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

Saturday, December 24, 2011

week ending Dec 24

Federal Reserve Balance Sheet Shrinks $31 Billion-- The Federal Reserve's balance sheet shrank slightly in November as the central bank continued to extend the maturity of portfolio holdings. The Fed's monthly balance sheet, released Friday, showed total assets of $ 2.817 trillion at the end of November, down $31 billion from a month earlier. The figure was $467 billion more than total assets a year earlier. "Holdings may fluctuate modestly as purchases and sales do not necessarily take place on the same day or in precisely the same size," the Fed report said. The latest report showed Treasury securities, mortgage-backed securities and federal agency debt securities held by the Fed all slid in November compared to a month earlier. The Fed is holding its balance sheet roughly steady, though in September the central bank said it would increase its share of longer-term Treasurys by $400 billion by June 2012 in an effort to make credit cheaper and spur spending and investment. To help keep mortgage rates low, the Fed also said it would reinvest the proceeds from maturing agency debt and mortgage-backed securities into mortgage-related debt. The Fed's portfolio has increased since the financial crisis as the central bank bought mortgage and government bonds to keep interest rates low and spur the economy.

FRB: H.4.1 Release--Factors Affecting Reserve Balances - December 22, 2011

NY Fed: Foreign Central Banks Borrowed $9.89 Billion in Latest Week - New borrowings at the Federal Reserve‘s dollar swap facility continued to rise in the week ending on Wednesday. Total new borrowing for the week was $9.891 billion, led by $5.122 billion in borrowing from the European Central Bank and $4.769 billion in borrowing from the Bank of Japan. Total outstanding borrowing stood at $62.599 billion, compared to $54.335 billion the week before. Last week, borrowing jumped on a surge in drawings from the ECB. The Fed’s dollar lending facility allows the ECB, as well as the central banks of Canada, Japan, England and Switzerland to draw on U.S. dollar funding to ensure their banking systems will not run short of liquidity. The facility was reestablished last year as Europe’s sovereign debt crisis quickened. In light of the ongoing difficulties faced overseas, the Fed recently eased borrowing terms on this well-regarded emergency lending tool.

Fed Loads Up Balance Sheets, Begins Europe Bailout On Same Week It Promises Not To: Data -- In spite of spending most of the last week reassuring the public that it would not use its resources to bail out European banks and having decided against engaging on another round of balance sheet expansion, data shows the U.S. Federal Reserve engaged in precisely those two actions that week. On Tuesday, the top decision-making body of the U.S. Federal Reserve held a monthly meeting in which -- according to a statement released that day -- it ultimately decided against the new round of monetary easing that many market observers had anticipated. On Wednesday, Fed Chairman Ben Bernanke met with Republican lawmakers, telling them behind closed doors that no bailout of Europe was forthcoming.  On Thursday, however, data released by that central banking entity showed that, in spite of public pronouncements and private promises to the contrary, the U.S. central bank tacitly did those very things last week.  A particularly troublesome datapoint further suggests the Fed quietly bailed out a major financial institution midweek, something at least one bank strategist has already surmised.

The spike in Fed's balance sheet is not QE3 - While the world watches the ECB, China, and now North Korea, the Fed's balance sheet has reached a new high last week. There are two components of this balance sheet increase: a large spike in the Central Bank Liquidity Swap (discussed earlier) and a substantial purchase of mortgage-backed securities (MBS). This has led to some speculation about the fed's next move, but the rationale here is actually quite simple.  Just as was the case last year, with mortgage rates hitting new record lows, the refinancing activity has stayed elevated, particularly since August.  This caused a decline in the principal amounts of MBS held by the Fed (blue chart above).  Last week's purchase was simply an adjustment to compensate for some of that decline. There is broad consensus however that at some point it may no longer be just an adjustment.  Dealers think the Fed will soon begin an MBS purchase program that will drive mortgage rates to extremely low levels.As a result, the 30 year fixed mortgage could hit 3.5% or even lower.  The last FOMC meeting however provided no hint of such program. The Fed is not in a hurry to launch something like this for two reasons.  First, at this stage it is the only viable tool that will have a material impact on asset prices and they want to reserve it for a potential escalation of the European crisis.  Second, the Fed is not totally immune from political pressure, and such a move will generate a great deal of criticism.  Given the relatively decent economic data coming out of the US, "operation twist" is all we are going to get for now.

Fed Could Keep Rates Near Zero Into 2014 - The Federal Reserve could signal it is likely to keep short-term interest rates near zero into 2014 or beyond, to bolster the fragile economic recovery.  Fed officials have grown increasingly uncomfortable with their August statement that they are likely to hold short-term rates exceptionally low at least through mid-2013. Some believe low inflation and high unemployment could warrant low rates for longer. Updating the view on rates has become an important part of Fed discussions about how the central bank explains its goals and policies to the public.  When the Fed revises its communications approach, there is a good chance it will cease offering a fixed date for the timing of rate increases. Instead, officials could signal their intentions by publishing a range of their forecasts for rates along with their quarterly economic projections.

Fed's Lacker Sees Moderate Growth, Urges No New Stimulus -- Federal Reserve Bank of Richmond President Jeffrey Lacker predicted the U.S. economy will grow 2 percent to 2.5 percent next year, with inflation likely to meet goals though posing a risk. The recent cooling in prices “is likely to prove as transitory, as did the acceleration we saw earlier in the year,” Lacker said in a speech today in Charlotte, North Carolina. “Despite this year’s run-up, I believe the inflation outlook is reasonably good” though “I still view the risks to inflation as tilted to the upside.” The Federal Open Market Committee last week said the economy was expanding moderately despite “apparent slowing in global growth,” adding market strains pose “significant downside risks.” Fed Chairman Ben S. Bernanke said Nov. 2 that additional stimulus “remains on the table,” such as buying mortgage bonds or changing the way the Fed communicates its policy goals to the public. Recent data, including a drop in initial jobless claims to the lowest in three years, have prompted economists to raise their forecasts for the fourth-quarter growth rate. For example, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, on Dec. 16 raised his forecast to 3.5 percent from 3 percent.

More on the Bailout of the Banking System - J. Andrew Felkerson writes at AlterNet about the study he authored detailing the Federal Reserve’s bailout of financial institutions over the course of the latest crisis.  He explains some of the reasoning behind his study’s methodology, particularly with respect to his use of a cumulative measure of loans and asset purchases (the other two measures he uses involve the peak amount outstanding at a moment in time and peak weekly amounts): Perhaps the largest difference in our analysis is that we learned our money and banking theory from the late Hyman Minsky. He taught us that the modern economy is essentially financial, and as such, is prone to systemic financial crises that if left unchecked can lead to “bone crunching depressions.” Therefore it is essential to have a LOLR. Thus, any transaction between the Fed and the markets which is not part of conventional monetary operations, such as lending from the discount window or open market operations, represents an instance in which private markets were not able to or were unwilling to engage in the normal financial intermediation process. If it any point in time the private markets were capable (or willing) to carry out business as usual, Fed intervention would not have been required. Thus, we need to account for each extraordinary event, and the best way that we know to do this is by summing each instance–which results in a cumulative total of over $29 trillion dollars.

Fed's Once-Secret Data Released to Public - Bloomberg News today released spreadsheets showing daily borrowing totals for 407 banks and companies that tapped Federal Reserve emergency programs during the 2007 to 2009 financial crisis. It’s the first time such data have been publicly available in this form.  To download a zip file of the spreadsheets, go to For an explanation of the files, see the one labeled “1a Fed Data Roadmap.”  The day-by-day, bank-by-bank numbers, culled from about 50,000 transactions the U.S. central bank made through seven facilities, formed the basis of a series of Bloomberg News articles this year about the largest financial bailout in history.  “Scholars can now examine the data and continue the analysis of the Fed’s crisis management,” said Allan H. Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh and the author of three books on the history of the U.S. central bank. The data reflect lending from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Term Auction Facility, the Term Securities Lending Facility, the discount window and single-tranche open market operations, or ST OMO.

Tick, Tick, Tick -- Zero Hedge asks “Did The Fed Quietly Bail Out A Bank On Tuesday?” They describe their evidence as “circumstantial,” but bank credit exploded, the Fed made its first net MBS bulk purchase since QE1, and there was a surge in discount window borrowings. Of course we will find out what bank bellied up to the Fed’s discount window bar two years from now.  ZH quotes Barclays’ Joseph Abate, After months of virtually no use of the Fed’s discount window, borrowing jumped to an average of $400m/day in the week through Wednesday. The Fed reports only the weekly average of daily borrowing and the daily amount outstanding on Wednesday. From these figures, we estimate that on one day last week, total discount window borrowing reached $2.5bn. Of course, the same $400m/day weekly average could have been achieved with a bank borrowing $900mn on Friday. It is unclear what prompted this pick-up in borrowing from the Fed. There was neither a spike in the fed funds rate nor any disruption in the repo market, so we are a bit puzzled.

The ugly side of ultra-cheap money - Bill Gross - Not only does “bad money drive out good,” but “cheap” money may as well. Ultra low, zero-bounded central bank policy rates might in fact de-lever instead of relever the financial system, creating contraction instead of expansion in the real economy. Just as Newtonian physics breaks down and Einsteinian concepts prevail at the speed of light, so too might easy money policies fail to stimulate at the zero bound.  Historically, central banks have comfortably relied on a model which dictates that lower and lower yields will stimulate aggregate demand and, in the case of financial markets, drive asset purchases outward on the risk spectrum as investors seek to maintain higher returns. Near zero policy rates and a series of “quantitative easings” have temporarily succeeded in keeping asset markets and real economies afloat in the US, Europe, and even Japan. Now, with policy rates at or approaching zero yields and QE facing political limits in almost all developed economies, it is appropriate to question not only the effectiveness of historical conceptual models but entertain the possibility that they may, counterintuitively, be hazardous to an economy’s health.  Importantly, Gresham’s corollary is not another name for “pushing on a string” or a “liquidity trap”. Both of these concepts depend significantly on perception of increasing risk in credit markets which in turn reduce the incentive of lenders to expand credit. Rates at the zero bound do something more. Zero-bound money – credit quality aside – creates no incentive to expand it. Will Rogers once fondly said in the Depression that he was more concerned about the return of his money than the return on his money. But from a system wide perspective, when the return on money becomes close to zero in nominal terms and substantially negative in real terms, then normal functionality may breakdown.

Gross Confusion - Krugman - People have been asking me for reactions to this op-ed by Bill Gross, arguing that low interest rates are hurting the economy — an argument that he’s been making for a while now. The short answer is that I don’t understand his argument, and I suspect that he doesn’t either.What he seems to be saying is that low rates discourage lending, and hence make funds scarcer than they would be at a higher rate, e.g., at the zero bound, banks no longer aggressively pursue deposits because of the difficulty in profiting from their deployment. But there’s nothing stopping banks from making loans at profitable rates to firms that want more credit; the zero bound applies only to safe official assets. The zero rate isn’t a price ceiling; it’s what happens when you push rates on safe assets as low as possible, precisely to encourage people to buy other things instead. Gross seems to have joined the group of people who view current low rates as somehow unnatural, the result of policies that distort the market. But actually it’s quite clear that the “natural” rate of interest in the economist’s sense — the rate of interest that would match desired savings with desired investment at full employment — is negative. The zero bound is in fact a price floor rather than a price ceiling, enforced not by law but by the fact that people can always just hold cash.

Bill Gross Forgets About the Natural Interest Rate - Like Paul Krugman, I am am puzzled by Bill Gross' Op-Ed in the Financial Times.  Gross argues that the low interest rates of the Federal Reserve are causing the financial system to deleverage.  Thus, he concludes that Fed policy is actually hampering the recovery of the U.S. economy.  Now I agree with Gross that Fed policy is hampering the recovery, but it is not because monetary policy has been too loose.  Rather, it has been too tight.    What Gross fails to consider is that interest rates would be low now even if there were no Fed. This is because the economy is weak and as a result the natural interest--the interest rate consistent with economic fundamentals--is low.  As I constantly tell my students, never draw any conclusions about the stance of monetary policy by looking just at the target policy interest rate.  Instead, I tell them, look at the policy interest rate relative to the natural interest rate over the entire term structure.  Given the large output gap and the economic uncertainty, the natural interest rate is currently low and may even be lower than the actual federal funds rate.  Now this discussion should not be a surprise for Bill Gross.  PIMCO previously published a nice piece by Paul McCulley and Ramin Toloui on the neutral interest rate--another way of saying the natural interest rate--back in 2008 that argued the Fed may be slow to act and thus end up chasing down the neutral interest rate without ever getting to it. 

Why ZIRP doesn’t work - Bill Gross has a wonky column in the FT, saying that setting interest rates at zero doesn’t boost economic growth: With policy rates at or approaching zero yields and QE facing political limits in almost all developed economies, it is appropriate to question not only the effectiveness of historical conceptual models but entertain the possibility that they may, counterintuitively, be hazardous to an economy’s health. Certainly the record will show that countries with persistently low interest rates tend to have sluggish growth, and although the obvious causality there runs the other way — central banks cut rates in response to slow growth — it’s never been clearer than it is now that such policies don’t always work. Gross’s point is that zero rates, far from encouraging people to borrow more, actually encourage deleveraging instead, at both the short and the long end of the curve. Why wouldn’t people want to borrow at ultra-low interest rates? In part, because no one wants to lend at ultra-low interest rates:

Why the Global Shortage of Safe Assets Matters - One of the key problems facing the world economy right now is a shortage of assets that investors would feel comfortable using as a store of value.  There is both a structural and cyclical dimension to this shortage of safe asset problem, with the latter being particularly important now given the recent spate of negative economic shocks to the global economy.  These shocks have elevated the demand for safe assets and, as David Andolfatto argues, is probably the key reason why we see such low yields on U.S. treasuries.  Of course, these same shocks have also destroyed many of the once-safe assets (e.g. European sovereign bonds) adding further strain to this asset-shortage problem.  This shrinking stock of safe assets can seen in the figure below created by Credit Suisse (ht FT Alphaville): This figure shows that if one does not count French bonds as safe assets (a reasonable assumption), then about half of the safe assets disappeared by 2011. That is a tremendous drop and, as I see it, matters for two reasons.  The first reason is that many of these safe assets serve as transaction assets and thus either back or act as a medium of exchange.  AAA-rated MBS or sovereigns have served as collateral for repurchase agreements, the equivalent of a deposit account for the shadow banking system.  The second reason the assets shortage matters is that it creates a Triffin dilemma for the producers of safe assets, which says that a country with the reserve currency of the world has to produce more money than is needed domestically to meet the global demand for it.  This, however, requires running  current account deficits that over time may jeopardize the very reserve currency status driving this dynamic.

Jan Hatzius Interview on NGDP Targeting - The FT interviews Jan Hatzius of Goldman Sachs and spends time discussing, among other things, the Fed adopting a nominal GDP level target.

Delusions of helplessness, monetarist edition - I'm very sorry to do this, but today I must hit Scott Sumner with the Bat Boy pic. Bat Boy is deployed whenever an econ blogger makes a claim that is truly batty. But anyway, via Brad DeLong, I find Scott Sumner making this batty claim: Keynesian economists have never been able to accept my assertion that the fiscal multiplier is roughly zero because the Fed steers the (nominal) economy. Translated roughly from Monetarese into English, this means: "If Congress tries to boost output by spending money, the Fed will counteract this effort by enacting tighter monetary policy. Thus, stimulus can never work. Why is this a batty claim? Well, to see why, we must first identify the assumptions that would have to be true for the claim to hold. These are:

  • Assumption 1: The Fed can control the path of nominal spending (NGDP).
  • Assumption 2: The Fed does choose to control the path of nominal spending in a way that will cancel out any stimulus.

European financial tensions and the Fed - U.S. monetary policy has gone through three distinct phases since 2008. We may be about to begin the fourth. I would characterize the period from February 2008 through March of 2009 as the first phase of recent U.S. monetary policy. During this period, the Fed was concerned about the possibility of a full-fledged financial panic, in which no one is sure which financial institutions are going to fail next and as a result nobody is willing to lend to anyone for any purpose. By March of 2009, the threat of financial panic had subsided, but the economy was still in terrible shape. As the emergency lending programs were gradually unwound and closed, the Fed sought to maintain some stimulus by replacing these with purchases of mortgage-backed securities, agency debt, and long-term U.S. Treasury debt. A third phase, popularly dubbed QE2, began in November 2010, as the Fed decided to expand its balance sheet further with additional Treasury purchases. At the very last data point on each of the above figures (the December 14 totals), the eagle-eyed reader will detect a sharp but significant blip up. This can be seen more clearly in the following graph that focuses on just the last 9 months.

No Monetary Policy Is Not Just Another Name for Fiscal Policy - - I just read John Cochrane’s essay “Inflation and Debt” in the Fall 2011 issue of National Affairs. On his webpage, Cochrane gives this brief summary of what the paper is about. An essay summarizing the threat of inflation from large debt and deficits. The danger is best described as a “run on the dollar.” Future deficits can lead to inflation today, which the Fed cannot control. I also talk about the conventional Keynesian (Fed) and monetarist views of inflation, and why they are not equipped to deal with the threat of deficits. This essay complements the academic (equations) “Understanding Policy” article (see below) and the Why the 2025 budget matters today WSJ oped...And here’s the abstract to his “Understanding Policy in the Great Recession” article: I use the valuation equation of government debt to understand fiscal and monetary policy in and following the great recession of 2008-2009. I also examine fiscal and monetary policy alternatives to avoid deflation, and how fiscal pressures might lead to inflation. I conclude that the central bank might be almost powerless to avoid inflation or deflation; that an eventual fiscal inflation can come well before fiscal deficits or monetization are realized, and that it is likely to come with stagnation rather than a boom. The crux of Cochrane’s argument is that government currency is a form of debt so that inflation is typically the result of a perception by bondholders and potential purchasers of government debt that the government will not be able to raise enough revenues to cover its expenditures and repay its debt obligations, implying an implicit default through inflation.

Fed's Lacker 'Chastened' By 2011 GDP Forecast Error, Admits Fed Policy Effects Inflation More Than Growth -- Richmond Fed President Jeffrey Lacker on Monday said he was "chastened" by his incorrect GDP forecast for 2011 of above 3%, when it's likely to come in around 1.75%. He blamed the miss on the acceleration in commodity prices and the Japan earthquake as well as the lingering aftermath of the past recession, including "the still-overbuilt housing market." Lacker, who becomes a voting member in 2012 of the Federal Open Market Committee, said another lesson learned is that inflation can accelerate despite elevated levels of unemployment. Lacker, who forecasts 2012 U.S. growth of between 2% and 2.5%, added that monetary policy is often credited "with entirely too much influence on real growth" and that its main impact is on inflation.

250 Billion Reasons Why the Fed Hates Inflation (and Doesn't Care About Employment) - Let's start with the basics: Increased inflation results in (in a sense, is) a wealth transfer from creditors to debtors. Debtors get to pay off their loans in less-valuable dollars -- dollars that can't buy as much real-world stuff, stuff that humans can consume, that they value. If you're holding a hundred million dollars in bonds -- you've lent out hundred million dollars -- and bananas are going for a dollar apiece, an extra percent of inflation means that a year from now, you can only buy 99 million bananas. The people who borrowed the money from you get the other million bananas. If inflation stays up and the loan remains outstanding, they get another million bananas next year. You don't.You can start to see why creditors might be inflation-averse. How big is this wealth-transfer effect? Here's a quite conservative back-of-the-envelope calc. Figure that there are somewhere north of $50 trillion dollars in private "credit market instruments" out there in the U.S. as of Q3 2011 ($120 trillion in total liabilities). Do the math: 1% of $50 trillion is 500 billion dollars. One extra point of inflation transfers that much wealth -- buying power -- from creditors to debtors. Every year.This is probably an overstatement -- many people/businesses are both creditors and debtors, so part of the transfer is from them to themselves. But still: let's cut the number in half. An extra point of inflation transfers a quarter of a trillion dollars per year in buying power -- real wealth -- from creditors to debtors.

The Fed Always Thinks That Unemployment's Not a Problem - A couple of our gentle Bears have suggested that I repost this over here. Ask and ye shall receive. It's a good complement to and demonstration of the point I tried to make in my last post. From Mike Konczal:Their model is obviously telling them that whatever (non-)actions they're taking at the moment will solve the problem. And their model is obviously, consistently, and wildly wrong -- and always wrong in the same direction. Altering that model to accurately predict unemployment, of course, would require that they allow more inflation in order to address both of their mandates. And higher inflation utterly slams the real wealth of creditors. And the Fed is run by creditors.

Inflation Conspiracy Theories - Krugman - One response of inflation-fearers to the absence of the inflationary outburst they’ve been waiting for is to reject the numbers, and claim that the BLS is hiding a much higher rate of inflation than the official numbers say. You see that a fair bit in comments, and some credulous mainstream figures (i.e. Niall Ferguson) have also bought into this story. How do we know that it’s wrong? One answer is that people I know work with the BLS, and they really are doing the best they can. But that won’t convince the skeptics, since I am presumably also part of the conspiracy. Bwahahahaha. Another answer is that if inflation is much higher than reported, real GDP and real wages must have been plunging in recent years. That’s inconsistent with everything else we see, which corresponds to an economy with slow but positive growth. But there’s a third answer: we now have price measures calculated independently by people not in the government — in particular, the MIT Billion Prices Project. The BPP collects prices from the internet; this means that it’s not a perfect match for the consumer price index, which includes things such as services that are generally not sold online. But if inflation were much higher (or much lower) than reported, you’d expect to see a big divergence between the independent index and the official stats. But you don’t:

An Inflation Update - Krugman - With the combination of Christmas and everything else going on in the world, today’s personal income report didn’t get much attention. But I was checking the inflation numbers, and they’re worth highlighting. You may recall that at the beginning of 2011, conservatives were ranting about two supposed huge threats: deficits would send interest rates soaring, and the Fed’s policies would send inflation soaring. Well, 10-year bonds are yielding around 2 percent. And as for inflation, from the Dallas Fed data: As some of us had predicted, once the commodity bulge was behind us, inflation rates began subsiding. The fundamental problem is still jobs. Everything else has been just a distraction, and a reason not to act.

Is America Going the Way of Japan? - If you want to spook an economist, ask him about Japan. He will tell you of a ghastly place whose undying stagnation devours even the strongest stimulus. Quantitative easing, bank recapitalizations and fiscal spending all failed to revive the world’s soon-to-be fourth-largest economy.  As the same measures fall flat in America, some are beginning to worry that the United States could be headed for its own lost decades.  Japan’s example is chilling: Nominal G.D.P. is lower than it was in 1992, and home prices are down 60 percent from their peak and still falling. Given the size of its bubble, Japan was due a painful deleveraging, but what is truly striking is the country’s inability to recover more than 20 years later.  Deflation is the main culprit. Prices for almost everything in Japan fall steadily and offer little incentive to buy today when it will be cheaper tomorrow. Deflation needs little help destroying an economy, but in Japan’s case it is abetted by aging demographics and lagging innovation: Japan’s working-age population started shrinking in 1995, and productivity growth ground to a halt shortly thereafter.

Fed’s Kocherlakota: ‘A Little More Optimistic’ About Economy --A top U.S. central banker appeared to have little appetite for further monetary-policy stimulus, in comments made in a television interview Tuesday.  While a cooling in inflation joined with a rise in the unemployment rate "would be an argument for further accommodation," Federal Reserve Bank of Minneapolis President Narayana Kocherlakota noted the trade off between price pressures and long-term unemployment "might well cost us too much" if further easing were put in place.  Kocherlakota's comments came from an interview the central banker did with television business channel CNBC. The central banker held a voting slot on the monetary-policy setting Federal Open Market Committee this year, and proved a persistent critic of the actions taken by the central bank through much of the year.  Kocherlakota was one of a trio of officials who dissented at FOMC meetings earlier in the year, fearing new stimulus activities undertaken by the Fed were counterproductive. The policymaker has argued in past speeches that the case for easing policy has been hard to make, given continued economic growth and a lowering in the unemployment rate. He has also worried that monetary policy can't do much to fix a high jobless rate when the reasons for it are structural problems in the employment sector.

Fed’s Lacker: Impediments to Growth Deeper, More Persistent Than Thought - Federal Reserve Bank of Richmond President Jeffrey Lacker said Monday that impediments to U.S. economic growth are deeper and more persistent than initially thought, but he cautioned that further central bank efforts to boost employment could have an even bigger impact on inflation. “Despite large-scale efforts to provide more monetary stimulus, growth has disappointed and inflation has ratcheted upward,” Lacker said in remarks prepared for a Charlotte Chamber of Commerce economic outlook conference. This reflects the fact that growth isn’t governed by central bank monetary policy, “which implies that monetary stimulus can at times move inflation more than employment,” Lacker said.

Are Recoveries from Financial Crises Really So Different? - Fed - This paper studies the behavior of recoveries from recessions across 59 advanced and emerging market economies over the past 40 years. Focusing specifically on the performance of output after the recession trough, we find little or no difference in the pace of output growth across types of recessions. In particular, banking and financial crisis do not affect the strength of the economic rebound, although these recessions are more severe, implying a sizable output loss. However, recovery does change with some characteristics of recession. Recoveries tend to be faster following deeper recessions, especially in emerging markets, and tend to be slower following long recessions. Most recessions are associated with a slowing, if not outright decline in house prices, but recessions with large declines in house prices also tend to have slower recoveries. Long recessions and those associated with poor housing-market outcomes can lead to sustained output losses relative to pre-crisis trends. Consistent with microeconomic studies showing permanent income loss to job-losing workers during recessions, we find that the sustained deviation in output from trend is associated with a reduction in labor input, especially linked to declines in employment and labor-force participation following recessions. On net, our results imply that the output/employment gap following a severe, long recessions is considerably smaller than is typically assumed by standard macro models, which in turn may have substantial implications for macroeconomic policy during recoveries.  Full paper (3428 KB PDF)

2011 In Review: Four Hard Truths, by Olivier Blanchard: What a difference a year makes … We started 2011 in recovery mode, admittedly weak and unbalanced, but nevertheless there was hope. ... Yet, as the year draws to a close, the recovery in many advanced economies is at a standstill, with some investors even exploring the implications of a potential breakup of the euro zone, and the real possibility that conditions may be worse than we saw in 2008. I draw four main lessons from what has happened.

•First, post the 2008-09 crisis, the world economy is pregnant with multiple equilibria—self-fulfilling outcomes of pessimism or optimism, with major macroeconomic implications.
•Second, incomplete or partial policy measures can make things worse. We saw how perceptions often got worse after high-level meetings promised a solution, but delivered only half of one. Or when plans announced with fanfare turned out to be insufficient or unfeasible.
•Third, financial investors are schizophrenic about fiscal consolidation and growth. They react positively to news of fiscal consolidation, but then react negatively later, when consolidation leads to lower growth—which it often does.
•Fourth, perception molds reality. Right or wrong, conceptual frames change with events. And once they have changed, there is no going back. For example,... not much happened to change the economic situation in the Euro zone in the second half of the year. But once markets and commentators started to mention the possible breakup of Euro, the perception remained and it also will not easily go away.

Olivier Blanchard Isn't Very Serious -  Krugman -- And when you bear in mind that the Very Serious People have been wrong about everything, that’s a very good thing. What’s even better is that as the chief economist at the IMF, he’s helping make at least one international institution less austerity-mad than the others.Blanchard’s blog post on what went wrong in 2011 is, in fact, totally sensible and on point.Furthermore, if I am reading it right, it contains something of a bombshell:Third, financial investors are schizophrenic about fiscal consolidation and growth.They react positively to news of fiscal consolidation, but then react negatively later, when consolidation leads to lower growth—which it often does. Some preliminary estimates that the IMF is working on suggest that it does not take large multipliers for the joint effects of fiscal consolidation and the implied lower growth to lead in the end to an increase, not a decrease, in risk spreads on government bonds. To the extent that governments feel they have to respond to markets, they may be induced to consolidate too fast, even from the narrow point of view of debt sustainability. If I have this right, Olivier is suggesting that harsh austerity programs may be literally self-defeating, hurting the economy so much that they worsen fiscal prospects.

BOMBSHELL: IMF Admits Spending Cuts Can Make It Even Harder For Governments To Borrow: IMF economist Olivier Blanchard just published a blog post on 4 hard truths learned in 2011. Paul Krugman rightly flagged the third one as a bombshell: investors are schizophrenic about fiscal consolidation and growth. They react positively to news of fiscal consolidation, but then react negatively later, when consolidation leads to lower growth—which it often does. Some preliminary estimates that the IMF is working on suggest that it does not take large multipliers for the joint effects of fiscal consolidation and the implied lower growth to lead in the end to an increase, not a decrease, in risk spreads on government bonds. To the extent that governments feel they have to respond to markets, they may be induced to consolidate too fast, even from the narrow point of view of debt sustainability. I should be clear here. Substantial fiscal consolidation is needed, and debt levels must decrease. But it should be, in the words of Angela Merkel, a marathon rather than a sprint. It will take more than two decades to return to prudent levels of debt. There is a proverb that actually applies here too: “slow and steady wins the race. So basically, everything that's being tried right now -- aggressive austerity -- apparently only makes the problem worse. This has been evident to anyone who's watched what's happened in Greece (and Portugal, etc.) this year, but now the IMF is admitting it, and since they're among the chief advocates of austerity medicine, this data would be kind of a big deal.

Economists explain the last year in terms of charts

The Most Important Economic Chart of the Year - Ezra Klein surveyed 18 economists for their charts of the year. Here’s my candidate, courtesy of Spiegel Online: This chart illustrates the end of euro complacency. Investors once acted as though the euro eliminated not just currency risk but sovereign credit risk. All nations–from Greece to Germany–could borrow at the same low rates. No longer. As the financial crisis enters its fifth year, markets are again distinguishing between strong nations and weak. I subsequently discovered that I am not alone in choosing this chart. The BBC has a version of this as the first entry in its survey of top graphs of the year (with commentary by Vicky Pryce of FTI Consulting), and Desmond Lachman of the American Enterprise Institute included it in Derek Thompson’s survey of top graphs over at the Atlantic. P.S. For the United States, I think Brad DeLong is right: behold the shortfall in nominal U.S. GDP.

Will the economy turn around in 2012? - With the latest sightings of green shoots in the economy, it's natural to ask how long it will be until the economy recovers. Is an acceleration in economic activity just around the corner? Are we anywhere near the end of the long road back to a more normal economy? UCLA's Edward Leamer provides a nice summary of the typical way in which the economy exits from a recession. The first and most important two sectors to pick up after a recession are housing construction and household consumption. Once the recovery is fully underway, business investment picks up as well, but that doesn't happen until housing and consumption lead the way. The problem we face is that the sectors that generally lead us out of a recession are the sectors that were most damaged from the collapse of the housing bubble and the subsequent recession. Housing construction is unlikely to increase anytime soon, and households are still struggling to pay off their debt, debt that was made worse by the unemployment, stock crash, and housing price crash that came with the recession. (The automobile sector is also important in recoveries, but the signs there aren't any better.)

Waiting for the "kick" - THE fourth quarter has been a surprisingly good one for the American economy, but many observers have been wondering whether America can keep up the pace (now estimated to be a roughly 3.5% to 4.0% annual rate of growth for the last three months of 2011) in what is likely to be a difficult 2012 for the global economy. A rebalancing America will face an obstacle to continued export growth in the form of a weakening European economy and growth hiccups across emerging markets (though if a slowdown across the emerging world coincides with rebalancing there, then import demand—including demand for American goods—might slip less than exports). The good news for America is that several of the persistent domestic constraints on recovery appear to be eroding. Economists have been watching the housing sector for months now. Construction has been very depressed for several years: too depressed given continued growth in the population. A rise in prices, rents, and construction therefore seems likely, which could help fuel a rebound. Higher home prices should aid troubled borrowers and banks while also boosting spending through the wealth effect. And a rise in construction would buoy struggling labour markets, adding to the economy's spending power. Slowly but surely, a turnaround is emerging.

The Mysterious Case Of Recession Risk: Dec 2011 Edition - Will the threat come from within or without? Or are we set to be a two-time loser? Perhaps the more pressing question is whether it’ll come at all? The odds of a new recession appear low to many analysts, but the Economic Cycle Research Institute's weekly leading index (WLI) is still anticipating a fresh period of contraction. The latest reading of the rolling growth rate for ECRI's WLI is -7.5, the group reported on Friday. That’s up slightly from the previous week, but it's not enough of a change to spur a revision in ECRI's recession call that still stands since it first issued the warning in late-September. The appearance of a stronger U.S. economy over the past month or so vs. the ongoing recession forecast by ECRI is gaining attention as analysts consider if the improving trends in some of the economic news are misleading us. The latest addition for thinking that there's no recession coming these days is the weekly initial jobless claims report. Last week's update suggests that the labor market is strengthening. It's always dangerous to rely on one number for predicting the economic cycle, of course, but the sharp decline in this leading indicator looks compelling for expecting the labor market to maintain a moderate growth rate if not accelerate.

Europe Dragging Down U.S. in Record Correlation-- For all the evidence that the U.S. economy is expanding, the nation's credit markets are unable to decouple from Europe as everything from junk bonds to interest- rate swaps move increasingly in lockstep with the euro region. Correlation between the 17-nation currency and prices of a credit-default swaps index tied to U.S. junk bonds is at about the highest on record, Bloomberg and London-based Markit data show. Interest-rate swap spreads in the U.S., a gauge of fear in credit markets, are trading the most in tandem with European corporate credit since 2007. Even as economists forecast gross domestic product this quarter will expand at the fastest pace since June 2010, the cost for companies to borrow is more linked than ever to Europe. For U.S. credit markets to recover, investors need assurance Europe's leaders will contain a crisis that led to bailouts of Greece, Ireland and Portugal and threatens Italy and Spain, "You're living in fairyland if you think the U.S. won't be impacted by Europe,"

Analysis: Economy shedding debt but shackled by pessimism (Reuters) - Americans are making progress in working down their heavy debt burden, but are struggling to break out of another funk holding back the economy: their deep pessimism. Some economists point to a big drop in household debt as a sign that American consumers - once considered the driving force of the world economy - are primed to return to more spendthrift ways. But standing in the way of a stronger recovery, and possibly President Barack Obama's re-election as well, are unprecedented levels of concern that better days may not lie ahead. Research suggests that economic growth will suffer from a sinking feeling among consumers that their incomes will continue to lose ground to inflation. Even though households are digging themselves out of debt, the painful 2007-2009 recession could leave a lasting scar on their willingness to spend. "Given people's expectations, the outlook going forward does not suggest much upside for consumption," . "A lot of people will be radically different consumers." Polls show record levels of pessimism about future income despite slow improvements in the economy. Indeed, Gallup surveys have found Americans are even gloomier about their finances now than they were during the recession's darkest days.

Credit Stress Indicators - There are several possible channels of contagion from the European financial crisis. The most obvious is the trade channel. A recession in Europe will negatively impact U.S. exports. Although Europe is a major U.S. trading partner, exports only make up a small portion of U.S. GDP. Also some of the impact from trade would probably be offset by lower oil prices – and of course lower interest rates as investors seek safety (the European crisis is a key reason the U.S. 10 year bond yield is at 1.81%). A more significant channel would be tightening of U.S. credit conditions in response to the European crisis. That is why I looked so closely at the Fed’s October Senior Loan Officer Opinion Survey on Bank Lending Practices that was released in November. The survey showed “considerable” tightening on lending to European banks, and some tightening to European firms, but the survey showed no tightening in the U.S. (although lending standards are already pretty tight). There are other possible channels of contagion, such as less European lending to emerging markets and a slowdown in those economies – and then fewer exports from the U.S. to those emerging markets. But the most significant channel will probably be credit stress. Here are a few indicators of credit stress:

"Black Swan" Fund Creator Explains Why Central Planning Has Doomed Us All - In a must read Op-Ed in the WSJ, Mark Spitznagel, founder of "fat tail" focused hedge fund Universa, where Nassim Taleb has been known to dabble on occasion, explains the fundamental flaw with central planning, and specifically why "moral hazard" or the attempt to avoid the destructive part of natural cycles, is the greatest unnatural abomination ever conceived by man. His visual explanation should be sufficient for even such grizzled academics who have no clue how the real world works, as the Chairsatan, to comprehend why what he is doing is an epic abomination of every law of nature: "Suppressing fire, creating the illusion of fire protection, leads to the wrong kind of growth, which then invites greater destruction. About 100 years ago, the U.S. Forest Service took a zero-tolerance approach to forest fires, stamping them out at the first blaze. Fast forward to 1988 when a massive wildfire at Yellowstone National Park wiped out more than 30 times the acreage of any previously recorded fire." Another way of calling this, is what we have been warning about for years: delaying mean reversion does nothing but that. And when the Fed finally fails to offset the inevitable, and it will - it is a 100% certainty - the collapse and destruction will be unprecedented. Ironically, the only way the system could have been saved would be by letting it fail in 2008. Now, we are sorry to say, it is too late.

GDP Q3 Third Estimate: Cut to 1.8% from 2.0% - The Third Estimate for Q3 GDP came in at 1.8 percent, which is a downward revision from the Second Estimate of 2.0 percent, which was a downward revision of the Advance Estimate of 2.5 percent. Here is an excerpt from the Bureau of Economics Analysis news release: The increase in real GDP in the third quarter primarily reflected positive contributions from nonresidential fixed investment, personal consumption expenditures (PCE), exports, and federal government spending that were partly offset by negative contributions from private inventory investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.  The acceleration in real GDP in the third quarter primarily reflected accelerations in PCE, in nonresidential fixed investment, and in exports, and a smaller decrease in state and local government spending that were partly offset by a larger decrease in private inventory investment. Here is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product.

Q3 GDP Revised Downward To 1.8% - Third quarter GDP was revised downward once again to 1.8% on an annual basis. Personal consumption growth for the third quarter was also moved downward from 2.3% to 1.7%. Analysts expected GDP estimates to hold steady at 2.0%, after growing an estimated 1.3% in the second quarter. Last month, Q3 GDP was revised down sharply to 2.0% from 2.5% initially, a disappointing number amid generally positive data over the last few months. This newest revision marks a disappointment of 0.7% from the initial October estimates. Here's the basic release: Real gross domestic product -- the output of goods and services produced by labor and propertylocated in the United States -- increased at an annual rate of 1.8 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.The GDP estimate released today is based on more complete source data than were available forthe "second" estimate issued last month. In the second estimate, the increase in real GDP was 2.0percent. The increase in real GDP in the third quarter primarily reflected positive contributions fromnonresidential fixed investment, personal consumption expenditures (PCE), exports, and federalgovernment spending that were partly offset by negative contributions from private inventoryinvestment and state and local government spending. Imports, which are a subtraction in the calculationof GDP, increased.

Q3 GDP: Weaker Than First Thought - The U.S. economy expanded less than thought during the third quarter as consumer spending fell short of an earlier estimate, though signs point to stronger growth in the final months of the year. Gross domestic product, the broadest measure of all the goods and services produced in an economy, grew at an inflation-adjusted annual rate of 1.8% in the July to September period. While still the strongest performance of the year, the Commerce Department’s third estimate of GDP is lower than the previous reading of 2.0%. Economists surveyed by Dow Jones Newswires had forecast 2.0% growth. The economy’s lower growth level was largely due to a downward revision of how much consumers spent, especially for services such as health care. The latest estimate showed personal consumption expenditure, which accounts for about two-thirds of spending in the economy, rose by 1.7% in the third quarter. That compares to a previous estimate of a 2.3% increase. Here’s some reaction:

US GDP: Can We Blame the Grinch for Yet Another Downward Revision of Growth? - The third estimate of US real GDP for Q3 2011 brought yet another downward revision. Can we blame the Grinch who Stole Christmas? GDP is now reported to have grown at an estimated 1.8% annual rate in Q3 2011, less than the 2.0% second estimate released in November and less still than the 2.5% preliminary estimate reported in October Although slowing, the July-September 2011 quarter was the 9th consecutive quarter of growth since the end of the recession that lasted from Dec 2007 to Jun 2009. Even after the revision, Q3 GDP was still above its pre-recession peak reached in Q4 2007, although only by a razor-thin 0.04%. The revised Q3 data still suggest that after a recovery of 2 years duration, the expansion phase has now begun.Consumption was revised downward but still accounted for much of the growth in Q3. Investment was revised up to weakly positive compared with the negative number in last month’s second estimate. Federal government defense spending grew but was offset by continued decline of federal nondefense spending and state and local government spending. Exports grew even more strongly than previously reported, but they were offset by an upward revision of imports (a negative entry in the GDP accounts).

Visualizing GDP: The Consumer Is Key - The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself.My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product. Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. The contribution of PCE came at 1.24 of the 1.82 real GDP. However, this is a downward revision of the 1.63 PCE contribution to the 2.0 second estimate of GDP, which was a downward revision from the 1.72 PCE contribution to the 2.5 GDP Advance Estimate. For a long-term view of the role of personal consumption in GDP and how it has increased over time, here is a snapshot of the PCE-to-GDP ratio since the inception of quarterly GDP in 1947. I'll update these charts when the Preliminary Estimate of Q4 2011 GDP is released in late January.

Experts See a False Dawn in Economy’s Recent Gains — As the fourth quarter draws to a close, a spate of unexpectedly good economic data suggests that it will have some of the fastest and strongest economic growth since the recovery started in 2009, causing a surge in the stock market and cheering economists, investors and policy makers. In recent weeks, a broad range of data — like reports on new residential construction and small business confidence — have beaten analysts’ expectations. Initial claims for jobless benefits, often an early indicator of where the labor market is headed, have dropped to their lowest level since May 2008. And prominent economics groups say the economy is growing three to four times as quickly as it was early in the year, at an annual pace of about 3.7 percent. But the good news also comes with a significant caveat. Many forecasters say the recent uptick probably does not represent the long-awaited start to a strong, sustainable recovery. Much of the current strength is caused by temporary factors. And economists expect growth to slow in the first half of 2012 to an annual pace of about 1.5 to 2 percent. Even that estimate could be optimistic if Washington lawmakers fail to extend aid for the long-term unemployed and a payroll tax1 cut for the United States’ 160 million wage earners.

Trillion Dollar Asset Manager Says US Growth Will Not Exceed 1% Next Year - On Wednesday, European Central Bank President Mario Draghi came out with positive news that just might comfort investors with European exposure.According to the ECB, investors have been found to help fund the European sovereign bailout. The support came from an extremely unlikely source: European financial institutions. However, Pacific Investment Management Co. -- known as PIMCO -- does not see the events overseas as much of a saving grace. PIMCO announced some of its global projections for 2012, most of which were not so bullish. The global asset management firm stated that the ECB must say that it is the "lender of last resort" to calm investors' nerves. PIMCO went on to say that the ECB would likely "leap to the rescue" too late.The consensus seems to be that the ECB acted in time to help the Euro area banks. Analysts are relieved that the loans described above are three-year term loans instead of one-year, which could have put Europe in a "Lehman-like" situation. Ultimately and in agreement with PIMCO's views, everyone has acknowledged that Europe will have to change its financial system on a fundamental basis in order to revamp its economic health. Draghi has also made it clear that he's wary about emulating the US Federal Reserve by pursuing quantitative easing strategies.

ECRI Recession Call: Growth Index Goes Slightly More Negative -The Weekly Leading Index (WLI) growth indicator of the Economic Cycle Research Institute (ECRI) posted -7.7 in its latest reading, data through December 16. The latest public data point is fractionally more negative than last week's -7.5. The index has been hovering in a narrow range between -7.4 to -7.8 for the past six weeks. Earlier this month Lakshman Achuthan, the Co-founder of ECRI, spoke with Tom Keene on Bloomberg Television's Surveillance Midday. You can watch the video on the ECRI website here, with bold heading Recession Update. The eight-minute video is well worth watching in its entirely.  As I've repeatedly emphsized, ECRI's recession call is quite controversial in financial circles. The perma-bears are generally supportive of the forecast, while the predominantly bullish mainstream financial view ranges from skeptical to dismissive. The bullish view was supported yesterday by the latest Conference Board Leading Economic Index update. One of the Board's economists forecast "continued growth this winter, possibly even gaining momentum by spring" (more here). See also the fascinating article, A peek inside ECRI's black box, by an anonymous analyst who uses "New Deal democrat" as a by-line. The article shares the mainstream skepticism of ECRI's recession call, but it does so with an intelligent commentary and several supportive graphs.

Chicago Fed: Economic activity index declined in November - Earlier today, the BEA released the third estimate for Q3 GDP showing real GDP growth of 1.8% in Q3, revised down from 2.0%. A large portion of the revision was from personal consumption expenditures. The Chicago Fed release the national activity index (a composite index of other indicators): Index shows economic activity decreased in November Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.37 in November from –0.11 in October. Two of the four broad categories of indicators that make up the index decreased from October, and only the employment, unemployment, and hours category was positive in November. The index’s three-month moving average, CFNAI-MA3, remained level, at –0.24, from October to November. November’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. Likewise, the economic slack reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.  This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Chicago Fed Says Economic Activity Decreased in November - According to the Chicago Fed National Activity Index, in November economic activity decreased, and the current level remains below its historical trend. Here are excerpts: The index's three-month moving average, CFNAI-MA3, remained level, at -0.24, from October to November. November's CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. Likewise, the economic slack reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.  The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The index is constructed so that the historical index average is zero.  The first chart below is based on the complete CFNAI historical series dating from March 1967. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of coincident economic activity. I've also highlighted official recessions.   The next chart highlights the -0.7 level. The Chicago Fed explains:  When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.

White House’s Krueger: Lack of Demand Holding Back Economy - A lack of demand is causing the weak economy rather than uncertainty over taxes, regulation and economic policies, according to Alan Krueger, the chairman of President Barack Obama‘s Council of Economic Advisers. By attacking the argument that uncertainty is holding back economic growth, Krueger is trying to punch a hole through one of the main criticisms Republicans have of President Obama’s economic policies: that a burst of regulations and regulatory uncertainty in general are crushing job growth and hurting the economy. Republicans and business groups have long complained that the Obama administration’s regulation of everything from air quality to Wall Street is heavy handed and hampering growth. “The evidence, however, suggests just the opposite,” Krueger said in a speech delivered in Charlotte, N.C., pointing to record corporate profits while noting that individual companies rarely cite regulatory burdens as a reason for layoffs. “If regulatory uncertainty was hurting companies, why would corporate profits be at record levels?” 

Failure to extend tax cut will slow recovery - Congress has not been able to agree on extending the payroll tax cut, and as it stands, payroll taxes will increase in January. What impact will this gridlock have on the economy? What about the expiration of unemployment benefits, another effect of the failure to produce legislation on the payroll tax cut?  The payroll tax cut amounts to around $1,000 per year for the typical household, which adds up to a around $120 billion per year in additional purchasing power for the total workforce. If the payroll tax cut is not extended when Congress reconvenes, losing that much purchasing power would make an already slow recovery even slower.  However, if the tax cut is reinstated at some point and only lapses for, say, the month of January, then the impact will be much smaller. It would be inconvenient for workers to have their pay cut just as Christmas bills are arriving in the mail, but so long as the tax cut is reinstated relatively soon the economic effects shouldn't be too large. But if the tax cut is not extended at all (something I don't expect given how much the GOP seems to be losing politically over this move. But who knows -- I didn't expect it would go this far), then the impact would be more significant.

Debt is Endemic In Our System... And the Deleveraging Will be Brutal For Businesses and Investors Alike - Debt is absolutely endemic in our financial system. The average non-financial corporation in the US is sitting on a debt to equity ratio of 105%. Bank leverage while relatively low compared to Europe (13 vs. 25) is still high enough that an 8% drop in asset prices wipes out ALL capital. The situation is even worse for the US consumer. During the housing boom, consumer leverage rose at nearly twice the rate of corporate and banking leverage. Indeed, even after all the foreclosures and bankruptcies, US household debt is equal to nearly 100% of US total GDP. To put US household debt levels into a historical perspective, in order for US households to return to their long-term average for leverage ratios and their historic relationship to GDP growth we’d need to write off between $4-4.5 TRILLION in household debt (an amount equal to about 30% of total household debt outstanding).

Survival of the Wrongest - Krugman - Jeff Madrick has a good post on the 10 worst economic ideas of 2011. What continues to fascinate me — in a bad way — is how economic debate continues to be dominated by ideas that (1) are in conflict with textbook macroeconomics and (2) have led to bad predictions every step of the way. Dean Baker finds an example of what I’m talking about in today’s Washington Post, where a news article refers to our “swelling debt problem”. As Dean says, markets don’t agree that we have a swelling problem — interest rates on long-term U.S. debt are near historic lows. Now, markets could be wrong, but if you apply basic textbook macro, namely the IS-LM model, you learn that budget deficits should have no effect on interest rates when you’re in the liquidity trap. So the notion that we’re facing some kind of imminent threat from deficits isn’t based either on what the market is saying or on received economic theory. It is, when you come down to it, based on nothing more than a gut feeling that deficits must be a Bad Thing; and the people whose guts apparently get taken seriously have been wrong every step of the way. And yet this more or less made-up notion of a debt crisis, which is in the end a prejudice rather than a reasoned conclusion, is reported as a fact in what is allegedly a news story, not an opinion piece..

Much Ado About Nothing: Financial Repression Edition - There has been a lot of discussion on financial repression emerging in advanced economies as way for governments to handle the looming debt crisis.  According to some, financial repression is already in play in the United States as the Federal Reserve is keeping long-term interest rates artificially low to minimize financing costs to the Treasury.  Advocates of this view go on to note that the lowering of long-term interest rates is narrowing the net interest margins for banks and reducing the incentive for savers to fund the shadow banking system.  Financial repression, therefore, is causing financial intermediation to fall and is preventing a robust recovery.  There is a big problem with this view: it wrongly assumes that the drop in long-term interest rates over the past few years is solely the result of the Fed's large scale asset purchases (LSAPs).  While it is true that there has been a spate of empirical studies showing the LSAPs have lowered the term premium portion of long-term interest rates, most of these studies only show modest effects.  It is unlikely, for example, that the LSAPs can account for much of the 300 basis points plus drop in the 10-year treasury interest rate since 2007. A far better explanation for the large drop in long-term interest rates is one, the growing global demand for safe assets and two, the ongoing slump in the economy.  

It's Official: US Debt-To-GDP Passes 100% - With precisely one year left for the world and all of its inhabitants, at least according to the Mayans, not to mention on the day of the Winter Solstice, it is only fitting that US debt, net of all settlements for all already completed bond auctions, is now at precisely $15,182,756,264,288.80. Why is this relevant? Because the latest annualized US GDP, according to the BEA, was $15,180,900,000.00. Which means that, as of today, total US debt to GDP is 100.012%. Congratulations America: you are now in the triple digit "debt to GDP" club! (naturally, this is using purely "on the books" data. If one adds the NPV of all US liabilities, and adjusts GDP for such things as today's housing contraction, then the magical triple digit threshold was breached long, long ago). And here is the breakdown for the forensically inclined ones:  I. Total debt as of December 20: $15,131,979,264,288,80 (source):

Fitch Again Warns US Debt Burden Threatens AAA Rating - Fitch Ratings on Wednesday warned again that the United States' rising debt burden was not consistent with maintaining the country's top AAA credit rating, but said there would likely be no decision on whether to cut the rating before 2013. Last month, Fitch changed its U.S. credit rating outlook to negative from stable, citing the failure of a special congressional committee to agree on at least $1.2 trillion in deficit-reduction measures. "Federal debt will rise in the absence of expenditure and tax reforms that would address the challenges of rising health and social security spending as the population ages," Fitch said in a statement.  "The high and rising federal and general government debt burden is not consistent with the U.S. retaining its 'AAA' status despite its other fundamental sovereign credit strengths," the ratings agency said.  In a new fiscal projection, Fitch said at least $3.5 trillion of additional deficit reduction measures will be required to stabilize the federal debt held by the public at around 90 percent of gross domestic product in the latter half of the current decade.

World's Supply of 'Safe' Assets Runs Short: The world economy faces a shortage of super-safe financial assets, bonds for which there is almost no risk of default and for which the market is so big that investors can buy and sell them readily. When anything is in short supply, its price rises. The bond market is no exception. It has been pushing up the price of U.S. Treasurys, still seen as safer than nearly all alternatives. That has pushed down the yield, the rate at which the U.S. government borrows, to extraordinarily low levels. Persistent shortages prompt lasting change. The hard-to-answer question: What changes will a persistent shortage of these risk-free assets provoke? This phenomenon, more pronounced lately, predates the financial crisis. For years, high-saving economies like China and others bought dollars to keep their own currencies from rising in foreign-exchange markets. This yielded ever-larger piles of dollars to invest. In the mid-2000s, this money flowed into U.S. Treasurys and other AAA-rated dollar securities, depressing long-term yields even when the Federal Reserve was trying to boost them.  "In the financial system," says Mohamed El-Erian, co-chief investment officer of bond-market heavy Pimco, "you cannot replace something with nothing." For now, this benefits governments in the U.S. and (to the consternation of France) the U.K., which can borrow cheaply because they are drawing so much frightened money. Bill Gross, the other half of the Pimco team, describes the U.S. Treasury as "the cleanest shirt in the dirty-laundry pile."

Why the Global Shortage of Safe Assets Matters - One of the key problems facing the world economy right now is a shortage of assets that investors would feel comfortable using as a store of value.  There is both a structural and cyclical dimension to this shortage of safe asset problem, with the latter being particularly important now given the recent spate of negative economic shocks to the global economy.  These shocks have elevated the demand for safe assets and, as David Andolfatto argues, is probably the key reason why we see such low yields on U.S. treasuries.  Of course, these same shocks have also destroyed many of the once-safe assets (e.g. European sovereign bonds) adding further strain to this asset-shortage problem.  This shrinking stock of safe assets can seen in the figure below created by Credit Suisse (ht FT Alphaville):This figure shows that if one does not count French bonds as safe assets (a reasonable assumption), then about half of the safe assets disappeared by 2011. That is a tremendous drop and, as I see it, matters for two reasons.  Before getting into them, though, it is worth briefly reviewing the structural and cyclical dimensions to the asset-shortage problem.   The structural dimension is that global economic growth over the past few decades has outpaced the capacity of the world economy to produce truly safe assets.   Ricardo  Caballero, the author of this view, argues that it probably started with the collapse of Japaneses assets in the early 1990s, was exacerbated  by emerging market crises throughout the 1990s, and got heightened by the rapid economic growth of the Asia in the early-to-mid 2000s. These developments along with the fact that most of the fast growing countries have lacked the capability to produce safe assets made the assets shortage a structural problem.

A Surfeit of Dearth? Tight "Money" and the Decline of AAAs - This Credit Suisse graph posted by Cardiff Garcia on December 5 has been getting some serious attention in wonkier sections of the econoblogosphere: And Angry Bear's own Rebecca Wilder gave us this on December 21: (graphs) Brad DeLong discussed this on December 21, riffing off David Wessel's piece where he jumps on the bandwagon with a tarted-up version of the Credit Suisse chart. David Beckworth has the best commentary I've found on the subject so far: ...many of these safe assets serve as transaction assets and thus either back or act as a medium of exchange.  AAA-rated MBS or sovereigns have served as collateral for repurchase agreements, which Gary Gorton has shown were the equivalent of a deposit account for the shadow banking system.   The disappearance of safe assets therefore means the disappearance of money for the shadow banking system.  This prompts me to suggest a radical idea that I've been hesitant to broach for fear of revealing myself to be the internet econocrank that I am: that all financial assets are, in some very real or at least useful definitional sense, "money" -- even though you can't necessarily use them to buy a pack of gum at the corner store (you have to trade them for something currency-like first). I'll get back to that in a future post. Izabella Kaminska made a similar point back in November: ...quality collateral has become the most sought over security in town. So much so, in fact, that some quality collateral is hardly circulating.

Why the U.S. Treasury, the Bundesrepublik Treasury, the Japanese Treasury, the Fed, the ECB, and the BoJ Need to Be Pumping Out Safe Assets at a Much Faster Pace..., by Brad DeLong: Full-employment equilibrium in the demand and supply of currently-produced goods and services requires that there be enough cash to grease all the transactions so that sellers are happy selling to would-be buyers. If not--if there is a liquidity squeeze--we see a downturn and the shortage of cash reflected in low asset prices of (and high interest rates on) pretty much all other financial assets as people scramble to dump other assets for cash and do so until they can no longer bear the cost of letting value go at fire-sale prices. Full-employment equilibrium in the flow of funds through financial markets requires that businesses (and governments) issue enough liquid savings vehicles to absorb all the planned full-employment saving in financial assets. If not--if there is a savings vehicle shortage--we see a downturn and not low but high prices of financial assets and we see what should be the transactions balances of the economy diverted as cash is transformed into a savings vehicle. Right now, however, it is not the case that we are in a liquidity squeeze: the debts of credit-worthy governments are not at a discount but at a premium. Right now, however, it is not the case that we have a shortage of liquid savings vehicles: equities and corporate and junk bonds--and the bonds of non-credit worthy governments--are selling not for high prices but for low ones. There is, however, a third market equilibrium condition: a credit-channel equilibrium condition. The economy must possess enough AAA-rated assets suitable to serve as collateral to keep the moral hazard associated with lending your wealth to somebody who knows more about the deal than you do from causing a Minsky meltdown. If not we see a downturn and what we see now: relatively low asset prices for risky assets and assets perceived as safe selling at values far above any reasonable estimate of long-run fundamentals that does not take account of their value as collateral for greasing financial-intermediation transactions.

More on the Shortage of Safe Assets - As a follow up to my earlier piece on the shortage of safe assets, I direct you to Rebecca Wilder's post where she documents the broad decline of investment grade sovereign debt.  As I mentioned before, this increasing shortage of safe assets matters because because many of these assets serve not just as a store of value but as transaction assets that  either back or act as a medium of exchange. In other words, this problem matters because it adversely affects the demand for money and therefore nominal spending.  One solution is for producers of truly safe assets, primarily the U.S. Treasury, to create more safe assets.    Brad DeLong takes this view.  This approach, however, worsen the Triffin dilemma for the world's go-to safe asset, U.S. Treasury debt.  Another solution is for the Fed and the ECB to restore nominal incomes to pre-crisis trends. Doing so would spur a sharp recovery that would that would lower the demand for safe assets and increase the stock of safe assets.  Both of these developments would reduce the excess money demand problem and avoid worsening the Triffin dilemma for U.S. treasury debt.  See my previous post for more.

The Meme that Refuses to Die: Government Debt Must Be Paid Back - No it doesn’t.  It almost never is.  To pay back government debt, you have to run a budget surplus, and while there may be modest surpluses from time to time, they don’t add up to more than a minuscule fraction of all the accumulated debt.  But don’t take it from me, look at the record. The story is unmistakable: the US jacked up its public debt to finance WWII and increased it further in almost every year since then.  We are not paying off the debt left by our parents and grandparents, and our children and grandchildren will not pay off ours. The debt burden depends on the ratio of debt to GDP as well as the interest cost in servicing it.  The way to reduce this burden is to have a combination of real economic growth, inflation and modest interest rates.  If you want to show your solicitude for the well-being of future generations, demand macroeconomic policies that will boost demand and raise inflation a bit, consistent with continued low interest rates.

The Meme that Refuses to Die: Government Debt Must Be Paid Back - I'm stealing this headline directly from Sandwichman. He sez: No it doesn’t. It almost never is. To pay back government debt, you have to run a budget surplus, and while there may be modest surpluses from time to time, they don’t add up to more than a minuscule fraction of all the accumulated debt. But don’t take it from me, look at the record. Here's a longer-term view of nominal debt, zoomed in on successive times slices so you can see the changes:  David Graeber, from Debt: The First 5,000 Years: The reader will recall that the Bank of England was created when a consortium of forty London and Edinburgh merchants -- mostly already creditors to the crown -- offered King William III a £1.2 million loan to help finance his war against France. To this day, this loan has never been paid back. It cannot be. If it ever were, the entire monetary system of Great Britain would cease to exist. That loan was issued 317 years ago -- in 1694. Governments that issue their own money don't have to pay off their debts. They actually can't. In fact, they issue money -- the money that's necessary for a growing economy to operate -- by deficit spending. Private borrowers (and non-sovereign-currency states like Greece and Alabama) do have to pay off their debts (or default). That's why the level of private debt, not sovereign debt, is the big management problem.

Does Reducing the Federal Debt Cause Financial Collapse? - Of all the reading in Modern Monetary Theory that I’ve been doing of late, perhaps the most eyebrow-raising paragraphs I’ve come across are these, from the redoubtable Randall Wray: With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” (See Wray 1998, p. 63, and Stabile and Cantor 1991.) In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been six periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. (Thayer 1996) The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. This all to support the Modern Monetary Theory theory that government creates money through deficit spending (spending creates money, taxing destroys it), and that a growing economy requires more money — hence more deficit spending by government. (Whether those deficits are “financed” through borrowing/bond sales is something of a side issue now that we’re off the gold standard; government could just issue dollar bills instead of T-bills.)

This Time Is Different: Federal Debt Didn’t Dive Before the Depression - Randall Wray made a fascinating observation a while back: Since 1776 there have been six periods of substantial budget surpluses and significant reduction of the debt. ... The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. And I confirmed it (graphs): Every depression in U.S. history was preceded by a big drop in nominal Federal debt. Except this one. (Assuming that it would have been a depression absent herculean efforts by the Fed et al.) There was that dip in the 90s, but if we want to posit that, based on history, it was an at-least-necessary cause of the crash, we have to ask: why, in this case, did it take almost a decade to have its effect? A lot of things have changed since 1929.

    • • We have the FDIC and similar (explicit and implicit).
    • • The Fed is a much more active player in controlling government "debt" levels.
    • • The financial system is far more globalized. International flows of financial capital are much larger in proportion to the real economy.
    • • The stock of outstanding private debt is proportionally much bigger relative to government debt. Ditto the issuance and retirement of private debt relative to government issuance.
    • • In the 00s in particular, private debt issuance went crazy.

Why Wasn't Last Week's 30% Reduction In The Deficit Big News? - I have to admit that I didn't notice it either when the Treasury last week showed that the fiscal 2012 deficit could be almost 30 percent lower than the deficit actually recorded in fiscal 2011. The new estimate of $996.5 billion for the 2012 deficit that was included in table 2 of the Monthly Treasury Statement for October 2011 was an eye-popping $419.7 billion less than the $1.416.2 trillion deficit in 2011. The 2012 estimate is just that -- an estimate. Not only is the fiscal year only 10 weeks old, but the Treasury number is based on the mid-session review of the budget that was published in September, that is, more than 3 months ago. The number almost certainly will change as the year continues. So just to be safe, let's say that the federal deficit will fall from 2011 to 2012 by $350 billion rather than almost $420 billion ( could just as easily fall by more instead of less). The question remains: Why wasn't it bigger news? After all, other than the years immediately following World War II, this would be one of the largest one-year drops in U.S. history.

A Financial Crisis Needn’t Be a Noose, by Christina Romer - RECESSIONS after financial crises are long and severe, and the subsequent recoveries are protracted. That is the bold conclusion of “This Time Is Different,”1 the book by Carmen Reinhart and Kenneth Rogoff, and it has become conventional wisdom.  But while there are strong patterns in the authors’ mountains of data, this simple summary misses an important fact: There’s dramatic variation in the aftermaths of crises, and much of it is caused by how policy makers respond. This history has important implications today.  The Reinhart-Rogoff study emphasizes common patterns across crises. It eschews complicated statistical techniques, relying instead on simple graphs and averages. And the averages are stunning. For 14 major crises since 1929, the associated decline in real per capita gross domestic product5 averaged 9.3 percent. For postwar crises, it took an average of 4.4 years for output to return to its pre-crisis level. But study their charts more closely and you’ll find that those averages mask remarkable variation. Norway had only a slight decline in per capita G.D.P. — around 1 percent — after its 1987 crisis, and output was back to its previous level in just three years. By contrast, real per capita G.D.P. in Argentina fell more than 20 percent in conjunction with its 2001 crisis, and took eight years to recover.

Obama's stimulus failure | Dean Baker -The economy badly needs stimulus. The collapse of the housing bubble caused us to lose more than $1.2tn in annual demand. Residential construction collapsed when the bubble burst, falling by more than 4 percentage points of GDP, which translates into approximately $600bn a year in lost annual demand. The collapse of the bubble also led to the destruction of close to $8tn of bubble-generated housing equity. The wealth effect of this equity on consumption generated close to $500bn in annual consumption demand. In addition, the collapse of a bubble in non-residential real estate cost another $100bn or so in annual demand. Finally, the lost tax revenue from the collapse of the housing market and the resulting fallout have forced cuts of close to $150bn a year on state and local governments.  In total, the economy has lost close to $1.3tn in annual demand as a result of the collapse of the housing bubble. This explains the economy's weak growth and high unemployment. We can gather together a coven of market-worshipping Republicans and sacrifice all the workers and retirees we want, it still will not replace the demand gap. We can love the private sector as much as we want and it still will not make firms go out and invest and hire when they don't see demand for their products.

Nobody Could Have Predicted -  Krugman - For the most part I’ve been staying out of the “Why was the stimulus so inadequate?” debate, since it mostly revolves around an unanswerable question: could Obama have gotten more if he had tried and/or made a stronger case? One thing I would note, however, is that the defense people outside the administration make for the inadequate stimulus is very different from the defense the administration makes. Outside defenders argue that Obama got all he could; but administration figures like Jay Carney claim that the reason the stimulus wasn’t bigger was that nobody realized how deep the recession was going to be. That is, of course, not true — I, in particular, was tearing my hair out in public over the inadequacy of the plan: I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.” Let’s hope I’ve got this wrong.

The Tax Vox 2011 Lump of Coal Award: Kicking the Can Edition - Welcome to Tax Vox’s fifth annual Lump of Coal Award recognizing 2011’s ten worst moments in fiscal policy. It is hard to imagine so much ugliness crammed into a mere 12 months. But after much thought and debate, the winners are:

Economists' influence - Arnold Kling is wondering why economists have so little influence in the White House. But it’s not just the White House where they go unheard. A feature of the euro area’s debt crisis has also been that economists’ many ideas for solving the problem have been ignored. Economists’ lack of influence is not a local US phenomenon. Why is this? One reason , I fear, is that voters just don’t want to hear from economists. If you think the US deficit can be cut painlessly by cutting government spending without touching Medicare or Social Security, or by taxing the very rich alone, you’ll not want to listen to people who say things aren’t so simple. And if you think feckless borrowers and lenders should be punished, you’ll not be interested in those who think that moral hazard is only part of the euro area’s problem. This is magnified by one of the curses of our age - narcissism. Too many people think that all that matters is their own opinion, and shut out the dissonance that economists should provide; in many contexts, the fundamental principles of economics are “it‘s not that simple“ and “we can‘t be sure.”

Why Y? A disproof of Keynesian macroeconomics? - Nick Rowe - There's something really wrong with the way we do short run macroeconomics. We focus all our attention on the output of newly-produced goods and services. That's what we call "Y". We talk about Aggregate Demand and Aggregate Supply, and what we mean by AD and AS is the demand and supply of those same newly-produced goods and services. Keynesians then go on to divide Y into C+I+G, and C+S+T. Monetarists talk about MV=PY. Both agree that a recession is a fall in Y, caused by a drop in demand for Y. But a moment's reflection tells you this is wrong. It's not just new stuff that is harder to sell in a recession; it's old stuff too. New cars and old cars. New houses and old houses. New paintings and old paintings. New furniture and antique furniture. New machine tools and old machine tools. New land and old land.  If you want to sell new in a recession, you have to either drop the price, or not sell it. That's true for both new and old. There is absolutely nothing special about new stuff.

The Defining Issue: Not Government’s Size, but Who It’s For, by Robert Reich: The defining political issue of 2012 won’t be the government’s size. It will be who government is for. Americans have never much liked government. After all, the nation was conceived in a revolution against government. But the surge of cynicism now engulfing America isn’t about government’s size. It’s the growing perception that government isn’t working for average people. It’s for big business, Wall Street, and the very rich instead. “Big government” isn’t the problem. The problem is big money is taking over government. Government is doing less of the things most of us want it to do — providing good public schools and affordable access to college, improving our roads and bridges and water systems, and maintaining safety nets to catch average people who fall — and more of the things big corporations, Wall Street, and the wealthy want it to do.

Congress Cuts Winter Heating Aid For The Poor While Boosting The Defense Budget - Poverty in America is only getting worse, with data showing rising income inequality and the startling fact that half of all Americans are now either in poverty or considered low-income. Were it not for the government programs that comprise the social safety net, those numbers would be even worse. More than a quarter would live in poverty without the safety net, according to one study, and Social Security alone kept 14 million out of poverty last year. Despite that, Congress — and particularly Republicans in Congress — have made cuts to various programs meant to aid the poorest Americans.Congress reached a deal Thursday to avert a shutdown that would have begun at midnight tonight, and in doing so, Republicans found another low-income program to target, cutting funding for subsidies that help the poor stay warm during the winter by nearly 25 percent. At the same time, however, the Pentagon’s budget is getting a 1 percent boost, as the Associated Press noted:Highlights of the $1 trillion-plus 2012 spending legislation in Congress:

    • —$518 billion for the Pentagon’s core budget, a 1 percent boost, excluding military operations overseas. [...]
    • —$3.5 billion for low-income heating and utility subsidies, a cut of about 25 percent.

Senate Votes to Extend Payroll Tax Cut — In the ultimate cap to a year of last-minute, half-loaf legislation, the Senate voted overwhelmingly on Saturday to extend a payroll tax cut for two months, with the chamber’s leaders and the White House proclaiming victory, even as they pushed the issue of how to extend the tax cut and unemployment benefits into the new year.  In the unusual Saturday vote, the Senate approved a $30 billion package to extend unemployment benefits, a payroll tax holiday for millions of American workers and avoided cuts in payments to doctors who accept Medicare1 through February, when Congress will once again be locked in battle over whether and how to further extend those provisions.  In a second vote on Saturday, the Senate passed, 67 to 32, a large-scale measure to keep the government running through next September. The House passed the measure on Friday.  The agreement on extending the tax cut — should it get through the House — mirrors a series of 11th-hour deals devised by the 112th Congress that appear to solve an impending crisis, but simply push the issues forward, most notably the agreement last summer to raise the debt ceiling.

Robbing Peter to Pay Paul: US Economy Edition - The Administration seems to have cut a deal to extend the payroll tax cut, which is a smart economic move in terms of trying to support demand. But it's being paid for by an increase in the "G-fee" (guarantee fee) charged by FHA and Fannie Mae and Freddie Mac on the loans they purchase. In other words, anyone refinancing or taking out a mortgage now will be subsidizing reduced payroll taxes.  The result is robbing Peter to pay Paul, which means the economic benefits from extending the payroll tax cut are going to be muted by the chill this puts on the struggling housing market.   The argument that it will encourage homeowners to look for non-GSE/FHA loans is pretty silly and hides the foolishness of using housing to pay for payroll tax cuts. Homeowners don't choose whether they have a GSE loan or not. They choose whether to do FHA or not, but if it's not an FHA loan, the homeowner doesn't know if the loan is going to stay in the lender's portfolio, be sold to another lender, be sold to a GSE (and maybe securitized by the GSE) or be privately securitized. Raising the costs of the GSE execution might encourage more portfolio lending, but it's hard to believe that a few basis point change in GSE execution costs is going to suddenly make the private-label securitization market revive.  The problems in that market aren't just the economics--particularly of servicing--but the utter lack of trust investors have in the underwriting, documentation, and servicing. For the private-label market to revive, there will need to be a much more significant difference in execution costs between private-label and the GSEs. The increased G-fee doesn't do it.

The 16-Percent Solution—Hard on the Rich - The fate of The Temporary Payroll Tax Cut Continuation Act of 2011 remains uncertain. But thanks to a carefully crafted technical change to the current payroll tax cut, the Senate version prevents a handful of very high wage earners from potentially enjoying a huge windfall from the two-month tax break. The legislation would cut the payroll tax that funds Social Security from 6.2 percent of earnings to 4.2 percent, the same as this year. Over a year, the tax applies up to an earnings cap—$110,100—so the maximum tax savings would be $2,202. But the temporary extension would set a cap one-sixth that size, reflecting its two-month duration and reducing the maximum tax savings to $367. Under the Senate bill, workers with annual earnings under the full year cap would get the same increase in their paychecks during January and February as they would in those two months if the cut lasted through 2012. But people who earn more will see their take-home pay go up exactly the maximum $367 during the two-month period. Without this provision, a CEO drawing a $6 million salary would get the full $2,202 tax savings in his first 2012 paycheck. The temporary Senate bill would give her only one-sixth as much. Call it the 16-Percent Solution.

Boehner casts doubt on US stimulus deal  - The fate of a compromise deal to extend stimulus measures for the US economy for two months was thrown into doubt on Sunday after John Boehner, the Republican Speaker of the House, said he was opposed to the plan. Speaking a day after the Senate overwhelmingly approved a deal reached by the Democratic and Republican leaders in the upper chamber, Mr Boehner said the bill would be rejected by rank-and-file Republicans in the House when it was taken up this week. Mr Boehner said that negotiations should be reopened and should focus on finding a solution for the entire year, rather than just the two months covered by the Senate compromise. “How can you do tax policy for two months?” he said on NBC’s Meet the Press. “It is time to just stop. Do our work, resolve our differences and just extend it for one year.” Barack Obama, US president, has made the extension of payroll tax cuts and unemployment insurance the centrepiece of his economic agenda heading into the 2012 re-election campaign. Mr Boehner’s comments raise the prospect again that Congress will not reach an agreement on extending the tax breaks and benefits before they run out on December 31 if a new stalemate ensues. On Sunday evening, Dan Pfeiffer, the White House communications director, suggested Mr Obama was not prepared to reopen talks. “If House Republicans refuse to pass this bipartisan bill to extend the payroll tax cut, there will be a significant tax increase on 160m hardworking Americans in 13 days that would damage the economy and job growth,” Mr Pfeiffer said. “It’s time House Republicans stop playing politics and get the job done for the American people.”

White House accuses GOP of playing politics with tax cut (Reuters) – The White House accused House of Representatives Republicans on Sunday of playing politics with the fate of the payroll tax cut and warned that Americans could face a “devastating” tax hike if Republicans do not act. Republican House Speaker John Boehner has distanced himself from a two-month extension to the payroll tax cut passed in the Senate by Democrats and many fellow Republicans. “If House Republicans refuse to pass this bipartisan bill to extend the payroll tax cut, there will be a significant tax increase on 160 million hardworking Americans in 13 days that would damage the economy and job growth,” said Dan Pfeiffer, a senior aide to President Barack Obama.

Payroll tax cut extension in doubt amid House Republican uproar -  The fate of a payroll tax cut extension backed by the White House and overwhelmingly passed by the Senate is uncertain after a restive House Republican conference expressed displeasure with the two-month deal. Faced with the uprising on his right flank, House Speaker John A. Boehner (R-Ohio) retreated Sunday from his previous support for the package, saying the House does not expect to approve that plan on Monday night after it returns to Washington.“Well, it’s pretty clear that I and our members oppose the Senate bill,” Boehner said in an appearance on NBC’s “Meet the Press.” “It’s only for two months. You know, the president said we shouldn’t go on vacation until we get our work done. And frankly, House Republicans agree.” The move sets up the latest game of brinkmanship on Capitol Hill, in which a failure by lawmakers to pass a deal before New Year’s Day will result in a two percentage-point payroll tax increase on 160 million workers, the termination of unemployment benefits for some jobless Americans and a reduction in reimbursement rates for doctors who treat Medicare patients. Far-reaching repercussions for both political parties also loom.

What Does It Mean For House Republicans To Be In "Full Revolt" On Payroll Tax Cut? - Politico reported this morning that the House GOP rank-and-file are in "full revolt" over the payroll tax cut bill the Senate passed yesterday and that the results of the Monday vote on it are in doubt. The bill will pass the House as is if there is a straight up-or-down vote because the combination of a majority of Democrats plus a handful of Republicans will provide the necessary margin. This is the same formula that enabled other budget-related measures to be adopted this year when the GOP rank-and-file -- especially the first-termers -- were not happy with the legislation. The question is whether House Speaker John Boehner (R-OH) will be allowed by his caucus to do that this time. If the House GOP's anger is as great as Politico says, Boehner may not have that freedom.  Instead, to appease his members, Boehner may need a floor procedure that leads to a conference and, therefore, further negotiations, with the Senate.

Two-Month Tax-Cut Extension Makes No Sense - Sometimes, half a loaf is worse than none.  Congress is still undecided as to whether U.S. workers will keep their tax cut next year. The latest twist is that Senate approved a two-month extension to reduce social-security tax whitholdings. According to news reports, the House will vote down the Senate proposal, with some representatives preferring no extension and others preferring to extend for an entire year. There are two reasons why the proposals now floating around the Potomac make no sense from an economic point of view. First, the two-month extension imposes a high degree of uncertainty on the consumer sector. Come March, workers would either face a big tax hike (to 6.2% of earnings from the current 4.2% rate), or endure yet another period watching Congress bickering over extending the cut. House speaker John Boehner (R., Ohio) seems to recognize the folly of the two-month idea.Yet his Republican colleagues are fighting the extension because they want the stimulus — no matter how long it runs – -to be paid for via cuts in other government spending.This leads to the second reason why the current debate makes no economic sense: Cutting spending simply negates the growth support coming from the tax cut.

Republicans vote down 2012 tax deal  - Republicans in the House of Representatives voted down a 2012 tax deal on Tuesday, increasing the chances of a sudden jump in payroll taxes and a halt to unemployment benefits on January 1. The rejection, in a vote of 229 to 193 that fell largely on party lines, plunges Washington into another round of fiscal brinkmanship with only days left until the end of the year and creates the risk of a damaging squeeze on the economy at the start of 2012. "A short lapse in the payroll tax cut would reduce disposable income for most taxpayers in January 2012,”  If there is no agreement, then payroll taxes will rise from 4.2 to 6.2 per cent, several million Americans will lose unemployment benefits, and payments to doctors treating Medicare patients will be cut by 27 per cent on January 1. The House voted to reject a Senate deal extending all of these provisions for two months that had been passed by a bipartisan majority of 89-10. Instead, it called for a conference to reconcile the Senate’s bill with its own version that extends the payroll tax cut for 12 months. “Now, let’s be clear. Right now, the bipartisan compromise that was reached on Saturday is the only viable way to prevent a tax hike on January 1. It’s the only one,” said President Barack Obama, calling on House Republicans to “put politics aside”.

Republicans in House Reject Deal Extending Payroll Tax Cut - House Republicans on Tuesday soundly rejected a bill approved by the Senate that would have extended the payroll tax cut for most Americans beyond the end of the year and allowed millions of unemployed people to continue receiving jobless benefits.  The House vote, which passed 229 to 193, also calls for establishing a negotiating committee so the two chambers can resolve their differences. Seven Republicans joined Democrats in opposition.  It was far from clear whether the two sides would be able to bridge the gap by year’s end. If they fail to do so, payroll taxes for 160 million Americans will rise to 6.2 percent, from 4.2 percent, in January, for an average annual increase of roughly $1,000. Republicans said the two-month extensions provided by the Senate bill left too much uncertainty at a time of deep economic vulnerability and would leave Congress facing the same thorny issues early in the new year. They said it was a deeply inadequate half-measure that represented the old ways of Congress.

Democrats and Republicans agree to let benefits expire for 32,000 long-term unemployed -  Even if Congress manages to pass a payroll tax deal, the long-term unemployed in some of the states hardest hit by the recession will see their federal benefits cut back in the first two months of 2012. Thirty-five states with high unemployment qualify for the federal Extended Benefits program, which lifts the maximum length of unemployment insurance from 79 to to 99 weeks. Under the Senate bill, two states will fall out of the program by the end of February, cutting off benefits for about 32,000 Americans who are the longest of the long-term unemployed. As it stands, states can receive these extra federal funds according to a complex formula that examines how quickly unemployment has risen over the past three years. While the unemployment rate has remained high, it hasn’t risen sharply in recent months as it had earlier in the recession. As a result, by simply continuing the three-year “lookback” for Extended Benefits into 2012, the Senate bill will begin dropping states from the program. So states that had a sharp rise in unemployment in, say, 2007, but have been stagnant since, could see their benefits cut. The first two states to be cut off are Michigan and Minnesota. About 5,600 unemployed workers in Minnesota and 26,300 unemployed workers in Michigan will lose up to 20 weeks of additional benefits by mid-February under the Senate bill, the Democratic staff of the House Ways and Means Committee tells me.

Dysfunctional Politics: Both Sides Champion Tax Cuts, Obama Agrees - Result: No Tax Cut - Political maneuvering has taken on the theater of the absurd. Republican House Speaker John Boehner openly sings the praises of President Obama, as both want to extend tax cuts and unemployment benefits. That is odd enough in and of itself.  Moreover, the Senate has already passed a bill, yet the measure died in the House. What happened? Obama and House Republicans want a 1-year deal, the Senate passed a 2-month deal. Adding to the confusion, the Senate packed their bags and left Washington for the holidays while the House voted to kick the bill back to the Senate to negotiate with Senators who will not even be in town.

The Payroll Tax Cut Debate and the Dog That Didn't Bark - The tax deal negotiated at the end of 2010 extended the 2001-03 "Bush" tax cuts for two years, emergency federal funding of unemployment benefits by one year, and added a new "temporary" one-year reduction in the payroll tax. With expiration looming, the Senate recently passed a two-month extension funded by increases in fees charged by the overly subsidized government-operated housing loans guarantors Fannie Mae and Freddie Mac; the House has rejected that short duration and demanded either something longer or nothing at all. With the Senate gone and the House not budging, someone has to blink or the payroll tax cut is over on December 31. The payroll tax, which funds the Social Security program, thus dropped from 6.2 percent to 4.2 percent for calendar year 2011. (Employers and employees each pay 6.2 percent; the cut was on the employee side.) The reduction transferred $105 billion out of Social Security, plunging it into the red and increasing federal borrowing to cover the gap. So at a time when most experts think we need trim Social Security benefits and/or raise taxes that fund the program, we're cutting those taxes. Originally, it was supposed to be just for one year but now of course, we're debating on extending that indefinitely.

Congress leaves town with an uneasy stalemate and looming payroll tax hike - The House is gone, mostly1. The Senate vows not to return2. And President Obama is home in Washington while his family vacations in Hawaii3, hoping for some kind of agreement between the two that he can sign. That was the uneasy state of play Tuesday after a year of acrimony and stalemate came to a head on Capitol Hill, leaving millions of American workers facing a tax increase in two weeks. The House voted on Tuesday to reject a Senate compromise that would have extended a federal payroll tax holiday for two months, continued unemployment benefits for the long-term jobless and averted a cut in the reimbursement rate for doctors who treat Medicare patients. At its heart, the fight over the tax cut is only the latest incarnation of the same ideological clash that has afflicted Congress for the past year, over what the government should fund and how it should be paid for.

A Two-Month Payroll Tax Cut is Dumb, So Is How Congress Got There - House Republicans are right about one thing at least: Extending this year’s payroll tax cut for two months is ridiculous. The trouble is they are largely to blame for the very policy they are criticizing. Congress got itself in this mess because a few dozen self-styled tea partiers have refused since last summer to helo build a consensus agreement on either short-term stimulus or deficit reduction. Recall that the $4 trillion budget deal tentatively reached in August  by House Speaker John Boehner (R-OH) and President Obama would have accomplished both goals. It would have, at least, until it was blown up by the same faction. Over the past few months, this crowd was variously opposed a one-year extension of the payroll tax cut because A), they felt it was too temporary to have any real simulative effect B) they didn’t want to pay for it with a surtax on millionaires C) they didn’t want to pay for it with any tax increases on anybody D) they didn’t want to add to the deficit.  So after weeks of unproductive squabbling and with a deadline looming, Senate Democrats and Republicans agreed late last week to scale back the payroll tax holiday and pay for it with spending cuts and a new fee on mortgages. That got 89 votes in the Senate and, apparently, Boehner’s tacit agreement.  Wrong. The House back-benchers now demand a one year extension of the payroll tax holiday. This would be the same proposal they have opposed for the past two months

WSJ SLAMS House Republicans For Payroll Tax Cut Debacle, Says They Are Throwing 2012 Election To Obama - The conservative Wall Street Journal editorial board is slamming House Republicans today for their hard-line position on the payroll tax cut, writing that GOP lawmakers are throwing the 2012 election to President Barack Obama before it even begins.  House Republicans are refusing to pass the bipartisan two-month extension of the tax cut that passed the Senate on Saturday, demanding a year-long increase. But Senate Majority Leader Harry Reid says he'll only reopen negotiations on a longer deal once the House passes the Senate bill — and removes the immediate threat of a tax increase for most Americans.Senate Republicans say Boehner backed the sort-term bill until it became clear that many conservative Republicans would oppose the bill. Rather than pass the Senate bill with Democratic support, Boehner has positioned himself against the entire Senate. Here's what the Journal said: The GOP leaders have somehow managed the remarkable feat of being blamed for opposing a one-year extension of a tax holiday that they are surely going to pass. This is no easy double play.  Republicans have also achieved the small miracle of letting Mr. Obama position himself as an election-year tax cutter, although he's spent most of his Presidency promoting tax increases and he would hit the economy with one of the largest tax increases ever in 2013. This should be impossible.

Lemmings for Plutocracy - The Senate, having struck its compromise, has gone home. The House, controlled by delusional Republicans, has gone home. Payroll taxes are slated to rise, and unemployment insurance is set to expire before they return in January. The compromise wasn’t just between the two parties in the Senate, apparently. According to Wednesday’s Washington Post, House Speaker John Boehner and House Majority Leader Eric Cantor met with Senate GOP leader Mitch McConnell on Friday and told him they’d get the votes to pass the two-month extension deal he’d worked out with Harry Reid. Boehner and Cantor now say they made no promises, but McConnell certainly thought they did, and, as the Post story notes, “McConnell, a 27-year member of the Senate … has no history of communication errors.”  But Boehner, who is turning out to be the weakest speaker since the House was first gaveled to order in 1789, couldn’t hold his troops, whose caucus meetings, by numerous accounts, increasingly resemble the pep rallies of cults that have lost all feel for how other humans think. 

Why the Republican Crackup is Bad For America - Robert Reich - The crackup isn’t just Romney the smooth versus Gingrich the bomb-thrower. Not just House Republicans who just scotched the deal to continue payroll tax relief and extended unemployment insurance benefits beyond the end of the year, versus Senate Republicans who voted overwhelmingly for it. Not just Speaker John Boehner, who keeps making agreements he can’t keep, versus Majority Leader Eric Cantor, who keeps making trouble he can’t control. Some describe the underlying conflict as Tea Partiers versus the Republican establishment. But this just begs the question of who the Tea Partiers really are and where they came from. The underlying conflict lies deep into the nature and structure of the Republican Party. And its roots are very old. As Michael Lind has noted, today’s Tea Party is less an ideological movement than the latest incarnation of an angry white minority – predominantly Southern, and mainly rural – that has repeatedly attacked American democracy in order to get its way.

Getting the Facts Straight: Payroll Tax Edition - From Princeton political scientist Nolan McCarty’s blog: For me at least, one of the frustrations about the debate over extending the cut in the payroll tax is extent to which politicians have tried to exploit the public’s lack of understanding about how the Social Security system works.  The first lie is the Republican claim that extending the payroll tax will somehow deprive the Social Security system of funds and jeopardize the retirement security of seniors. Democrats have responded not with the truth but with the claim that the revenue losses from the extension will be offset by “general revenue.” Understanding why both of these claims are untrue requires some background knowledge of how Social Security works. Social Security is a pay-as-you-go system where current retirees are supported by the payroll tax payments of current workers. In 2010, the Trust Fund surplus was $94 billion or about 16% of the benefits paid. That is about the same size as the revenue short fall from the 2 point reduction in the payroll tax rate (the SS Trustees estimate a loss of about $90b for 2011). So even with this loss, payroll taxes and interest will cover the benefits paid. So one of two things will happen. The Treasury will actually give $90b to the Trust Fund. But because it is surplus, the Trust Fund will give it right back to Treasury in exchange for government debt. Or it could be handled the easy way: Treasury would just give the Trust Fund $90 billion in Treasury notes.

The problem with Obama’s payroll tax cut politics - As the showdown between President Obama and House Republicans continues, it is worth asking just how maintaining a cut in payroll taxes came to dominate the progressive agenda. To be clear, the economy (some recent good news aside) remains in serious need of fiscal support to alleviate the obvious crisis of joblessness. The simple history of how we got the payroll tax cut is pretty straightforward. In December 2010 the Bush tax cuts were set to expire, while the unemployment rate stood at 9.8 percent. The GOP Congress wanted an extension of the Bush tax cuts while the Obama administration wanted fiscal support to help lower unemployment. The primary outcomes of their negotiation were a two-year extension of the Bush tax cuts, a one-year extension of emergency unemployment insurance (UI) benefits, and a one-year payroll tax cut. This payroll tax cut in a sense supplanted the Making Work Pay (MWP) tax credit – a policy that President Obama campaigned on and which was part of the Recovery Act. It seems obvious why Republicans didn’t like the MWP credit – it was actually well-targeted at low- and moderate-income households and it was a tax cut associated with the Obama administration. So, to grease the wheels of getting more fiscal support into an economy that needed it, the administration acquiesced to this swapping out of the MWP credit for a payroll tax cut.

Payroll Industry Sees Major Flaws In Senate’s Two-Month Payroll Tax Cut Extension - The trade association representing companies that process payrolls for American businesses are telling Congress that the Senate’s two-month payroll tax cut extension may be impossible for them to implement correctly: Officials from the policy-neutral National Payroll Reporting Consortium, Inc. have expressed concern to members of Congress that the two-month payroll tax holiday passed by the Senate and supported by President Obama cannot be implemented properly. Pete Isberg, president of the NPRC today wrote to the key leaders of the relevant committees of the House and Senate, telling them that “insufficient lead time” to implement the complicated change mandated by the legislation means the two-month payroll tax holiday “could create substantial problems, confusion and costs affecting a significant percentage of U.S. employers and employees.” ABC News obtained a copy of the letter, which can be read HERE. Isberg agreed that it would be fair to characterize his letter as saying that the two-month payroll tax holiday cannot be implemented properly.

Payroll Tax Situation Won't Be Resolved Until Next Week - I haven't yet seen a good scenario for how the stalemate between the House and Senate on the payroll tax extension will play out. But no matter what happens, there are three reasons why I'm convinced it won't occur until next week rather than by this Friday as some are suggesting. First, members of Congress don't want to return to Washington before Christmas. Yes, this could be handled without a quorum in either house by the representatives and senators who live close to DC. But there are some members who will insist on being present for the debate so that option may not be possible. Second, as I've reminded CG&G readers a number of times since they said it to me last February, the tea party wing of the House GOP feels strongly that it will get the best deal only if it pushes every negotiation to the very last possible moment. That's what's happened on every other budget-related issue this year and there's no reason to expect that it won't happen again on the payroll tax extension.Third, Democrats are not in any hurray to resolve this situation given what appears to be the political beating the GOP is taking on the issue in the polls.

McConnell breaks ranks with GOP as Obama calls for end to tax impasse - Republican disunity over the congressional tax showdown was exposed on Thursday when, in an extraordinary move, the party's leader in the Senate publicly broke ranks with his House colleagues. After days of silence, Mitch McConnell lined up with Barack Obama and the Democrats to call for the safe passage of the payroll tax bill, instead of rallying behind his beleaguered colleague in the House, speaker John Boehner. The rupture in the Republican party increases Obama's chances of securing a rare victory over the House Republicans, who have repeatedly humiliated him this year. Boehner is blocking passage of a bill that would extend tax breaks to 160 million Americans, a measure introduced by Obama last year to help stimulate the US economy. If the bill is not passed by 31 December, American taxpayers face cuts in their pay of an average of $40 every two weeks. About 1.3 million people stand to lose unemployment benefit. Obama, at a White House event organised to step up pressure on Boehner, described the standoff as "ridiculous", and paraded some of the 30,000 Americans who have written to the White House detailing the impact the tax rises would have on their lives.

Boehner Signs On to U.S. Payroll Tax Deal - Deserted by many of his fellow Republicans, U.S. House Speaker John Boehner surrendered to attacks from President Barack Obama and congressional Democrats and agreed to a two-month extension of a payroll tax cut that he derided hours earlier.  The decision kicks the fight over extending the tax cut for 160 million U.S. workers into early next year without resolving deep divides over how to cover the cost through 2012.  Democrats are focused on imposing a new tax on income exceeding $1 million while Republicans want to cut the federal work force and freeze pay for government workers. Republicans also want to attach policies to a payroll tax cut extension -- opposed by Democrats -- such as a rewrite of the unemployment system or weaker rules for industrial emissions.  The deal that Boehner and Senate Majority Leader Harry Reid, a Nevada Democrat, agreed to yesterday includes language that calls on Obama to accelerate approval of the Keystone XL Canadian oil pipeline. Both chambers plan to pass the tax cut deal today by unanimous consent, which means most lawmakers won’t have to return to Washington over the holiday recess.

House Republican Leaders Agree to Extend Tax Cut Temporarily - NYT - Largely silent in the payroll tax fight in recent days, Senator Mitch McConnell of Kentucky, the Republican leader, on Thursday suggested a possible way out of the standoff3, proposing that the House pass an extension of the tax break while Senate Democrats commit to forming a negotiating committee to reach a long-term agreement.  As the impasse over the legislation headed toward Christmas, Mr. McConnell, who led Senate Republicans in voting for the two-month extension last Saturday4 before the House balked, said he did not consider the objectives of House Republicans and Senate Democrats to be mutually exclusive.  “House Republicans sensibly want greater certainty about the duration of these provisions, while Senate Democrats want more time to negotiate the terms,” he said. “We can and should do both. Working Americans have suffered enough from the president’s failed economic policies and shouldn’t face the uncertainty of a New Year’s Day tax hike.”  In suggesting that Senator Harry Reid, the majority leader from Nevada, name members of a House-Senate conference committee first proposed by House Speaker John A. Boehner of Ohio, Mr. McConnell was trying to find House Republicans a face-saving way to go ahead with a vote for an extension but still claim they won some concessions from Democrats and the White House.  In his statement, he emphasized that any measure was likely to include a push for construction of a new oil pipeline from Canada to the Gulf of Mexico.

House GOP agrees to 2-month extension of payroll tax cut - Bowing to crushing political pressure, top House Republicans have agreed to extend the payroll tax cut for 160 million Americans through February, House Speaker John A. Boehner said Thursday evening. As part of the deal, Senate leaders will appoint a conference committee to negotiate a full-year tax cut after Jan. 1. "Senator Reid and I have reached an agreement that will ensure taxes do not increase for working families on January 1 while ensuring that a complex new reporting burden is not unintentionally imposed on small business job creators,” Boehner (R-Ohio) said in a statement. “The Senate will join the House in immediately appointing conferees, with instructions to reach agreement in the weeks ahead on a full-year payroll tax extension. We will ask the House and Senate to approve this agreement by unanimous consent before Christmas. ” The measure, which the Senate passed Saturday in a bipartisan vote, also extends benefits to the unemployed for two months and averts a cut in the reimbursement rate for doctors who treat Medicare patients. And it includes a small, technical change to how payroll taxes are collected to ease the burden of implementing the tax cut for small businesses, an aide said.

Reports: Republicans give in, agree to temporary unemployment benefit, payroll tax extension - In the face of mounting political pressure, fading conservative support and building public rage, House Republicans have agreed to a temporary extension of unemployment benefits and the payroll tax cuts. House Republicans and Senate Democrats have reached a compromise that will keep unemployment benefits going and the payroll tax cut in place through the end of February, the National Journal is reporting. The deal would essentially give the Senate what they'd wanted: a Christmas break without the chance of unemployment benefits running out and taxes rising about $40 per family per month. Takeaway Washington correspondent Todd Zwillich, citing an unnamed Republican house aide, said the plan will be presented to the rank-and-file in a conference call tonight. If call goes well leadership hopes to pass the deal by unaninmous consent Friday at 10 a.m. Some Tea Party-backed House members had insisted they would not go for anything short of a one-year extension, but the legislation they'd passed to get there had been so politically unpopular in the Senate that Republicans and Democrats sought to buy more time by pushing through a status quo extension.

House GOP's White House Stocking Stuffer: The Payroll Tax Cut - The cave-in by the House Republicans on the payroll tax is on terms that keeps this conflict going well into the election year--and on terms very favorable to Barack Obama and the Democrats. For the GOP, the two-month extension of the payroll tax cut is the worst possible politics. First, they look weak (because they are weak); and second, the same drama will be replayed next year with the same outcome. Raising taxes on millionaires rather than cutting Social Security or Medicare, or hiking payroll taxes, wins every time. As Republicans keep re-fighting this losing battle, the message will be reinforced over and over again that Democrats are for the working person while Republicans defend the richest. The fact that key Republicans in the Senate and House can't get their act together is frosting on the cake. Likewise, the sheer extremism of Tea Party caucus members who'd rather lose their seats than compromise. They are likely to get their wish.

Payroll Tax Cut Fight: House GOP Agrees To Two-Month Extension -- Ending a dramatic, weeks-long political standoff, House Republican leaders agreed Thursday to pass a Senate-endorsed short-term extension of the payroll tax cut in return for House-Senate negotiations on a year-long package. The House will take up and pass the bill as soon as Friday at 10 a.m. The bill will come up under unanimous consent, which means it can pass on a voice vote with only two lawmakers present: one in the speaker's chair and one to offer up the bill. Under that scenario, the Senate can take up the bill immediately afterward and also pass it on a voice vote, clearing it for the president's desk. President Barack Obama, who has been pounding House Republicans all week for preventing the Senate-passed bill from going through, hailed the news of a deal.  "This is good news, just in time for the holidays. This is the right thing to do to strengthen our families, grow our economy, and create new jobs. This is real money that will make a real difference in people's lives."The agreement ensures that a 2 percent tax break for about 160 million people will not expire on Jan. 1, and that Medicare payments will not be slashed for doctors. Emergency unemployment benefits also will continue.

Republicans Cave, Democrats Shocked - If there's one thing liberals know about their representatives in Washington, it's that those Democrats are a bunch of wimps. All Republicans have to do is draw back their fists, and Democrats will flinch. "What if they criticize us???" they whine, as they cave in on progressive principles again and again. That's the story liberals tell, and much of the time it's true. But nothing is true in politics one hundred percent of the time, and so yesterday we saw Republicans cave in on the payroll tax cut extension. There's a lot of technical parliamentary hoop-jumping involved, but basically the House is going to pass the two-month extension, and in exchange there will be a conference committee that attempts to work out a one-year extension. So we get to go through this all over again in two months.

Payroll Tax Cut's Last Hurdle: Getting 'Unanimous Consent' : The Two-Way : NPR: As with everything happening in Congress these days, the deal reached Thursday to pass a 2-month extension of a payroll tax cut and jobless benefits for the long-term unemployed isn't a "done deal" just yet. And for it to be "done" later today will require the "unanimous consent" of House members — something that sounds rather daunting as one of the most partisan years in recent memory draws to a close. As Politico wonders this morning, the key question is: "Will House frosh comply?" "At least two House freshmen [have] left open the possibility that they would object to the unanimous consent to extend the tax holiday by two months while congressional conferees work out a year-long deal," Politico reports. They are Rep. Mo Broooks (R-Ala.) and Rep. Mike Kelly (R-Pa.). Basically, as CBS News explains, the plan is for a few of the House members who haven't already left Washington for the holidays to meet in the Capitol this morning and move to pass the extensions by "unanimous consent." It's a procedure that allows things (usually those that aren't controversial) to be passed so long as no lawmaker stands up to object. If all goes as planned, the very slightly tweaked package also get "unanimous consent" from the Senate (where there is strong, bipartisan support and it's already been approved once). But if any House member decides he or she doesn't like the deal, then the full House would have to reconvene — probably next week — for a roll call vote.

Payroll Tax Cut's Last Hurdle Cleared: House Gives 'Unanimous Consent' - Marking the end of the latest pitched political battle in Washington, President Obama said this afternoon that Congressional approval of measures to extend for another two months a payroll tax cut and benefits for the long-term unemployed is "good news just in the nick of time for the holidays.""I said it was critical for Congress not to go home without preventing a tax increase" and the expiration of the long-term jobless benefits, Obama said, "and I'm pleased to say they've got it done."He then repeated that after the holidays he wants Congress "to keep working, without drama, without delay, to reach an agreement that extends this tax cut as well as long-term unemployment insurance, through all of 2012." The president also repeated his oft-cited estimate that the payroll tax cut means an extra $40 in every paycheck for a typical family.

Unemployment Extension Passed but Eligibility for Full 99 Weeks May Decline - The payroll-tax cut package that was passed by Congress also provides another two months of extended federal unemployment benefits, but fewer Americans may be eligible for the full 99 weeks offered in the hardest hit states. Jobless Americans will still be eligible for a maximum 99 weeks of benefits, but workers in some states may be limited to only 79 weeks. The law determines each state’s need for extra benefits based on whether the unemployment problem is significantly worse than over the past three years. Democrats wanted to tweak the law to factor in the duration of America’s high unemployment, allowing states to take into account the change in unemployment over the past four years. That would help some states avoid falling back to a maximum 79 weeks of benefits. Republicans didn’t agree to the change. “We’ll come back and revisit that,” House Majority Leader Harry Reid said. He noted he had picked Sen. Jack Reed (D., R.I.) to serve as one of the four Senate Democratic negotiators of a new package. The Democrat’s state had a 10.5% jobless rate in November — higher than the nation’s — and he is especially sensitive to the concerns of the long-term unemployed.

Obama signs payroll tax cut extension - -- President Barack Obama signed a two-month extension of the payroll tax cut Friday, ending what had been a heated political stalemate and sealing a hard-fought win for Democrats on an issue -- taxes -- that has historically favored the GOP. Earlier in the day, the measure cleared the Democratic-controlled Senate and the Republican-controlled House of Representatives by unanimous consent, a procedural move allowing the measure to pass even though most members of Congress were already home home for the holidays. Among other things, the $33 billion bill also includes a two-month extension of emergency federal unemployment benefits and the so-called "doc fix," a delay in scheduled payment reductions to doctors who treat Medicare patients. Congress will consider a longer extension of all three measures when it reconvenes in January. Obama also signed a separate appropriations bill funding the government through September 2012, wrapping up a legislative year marked by repeated partisan brinksmanship and declining public approval of a seemingly dysfunctional Congress.

Payroll tax cut etc. passes all hurdles: House, Senate and President's Signature - Congress passed, and President Obama signed into law, HR 3765, the two-month payroll tax cut and unemployment compensation extension act.   Obama Signs Two-Month Payroll Tax Cut Extension, (Dec. 23, 2011).  It also again postpones full cuts to doctors for medicare and requires a decision on the Keystone XL pipeline within 60 days.  The only change in the bill compared to the one passed by the Senate and first rejected then now passed by House Republicans is a simplified 'recapture' provision to cover the possibility that no extension of the tax cut is passed after the first two months.  The bill is effective through February 2012. The JCT's analysis of the revenue provisions of the act is available on the JCT website , JCX-58-11 (Dec. 23, 2011) and the estimated revenue impact is available as well, JCX-57-11 (Dec. 23, 2011).

Charles Krauthammer Gets Payroll Tax Extension Very Wrong - The fact that his conclusion and headline are correct doesn't mean that there not enough wrong in this column by Charles Krauthammer in today's The Washington Post to put together a whole syllabus for a semester-long seminar rather than just a quick blog post. For example, Krauthammer saying that the $1000 tax credit proposed by George McGovern 40 years ago is equivalent to the $1000 per average taxpayer impact of continuing the payroll tax reduction today makes no sense from any perspective. And the idea that business will have any trouble dealing with a two-month extension when it's not a change from existing law and doesn't require than they make any changes from what they're already doing is nonsense. But the most infuriating part of the column is Krauthammer's assertion that a two-month extension is bad for businesses. I can't imagine any retailer being unhappy about its customers having at least two more months of additional buying power. Yes, it's not as good as them having an additional $20 or so every two weeks for a year, but it's obviously better than them not having it at all.

Payroll Tax Cut Bill Includes New 'Recapture' Tax for the Wealthy  - So now that the payroll tax cut has been extended for two months, what does that mean for taxpayers? Well, even though the collective wisdom is that Congress will hammer out a longer term deal, the IRS gets to play a game of “let’s put a bunch of provisions in place within the space of a few days only to turn around and undo it in a few weeks.”  The IRS further advised that: Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012. More importantly, the IRS has advised – since Congress didn’t give this much play at all – that the law includes a new “recapture” provision for employees who will be paid more than $18,350 in wages during those first two months. The Social Security cap for 2012 is $110,100 so that Social Security taxes are not imposed on wages over that amount; there is no corresponding cap for Medicare. Under the new law, an additional income tax will be imposed on those taxpayers who receive more than $18,350 in wages during that two month period. The tax is an amount equal to 2% of the amount of wages received during the two-month period in excess of $18,350 (and not greater than $110,100).

Wonkbook: So, what happens in 60 days? - Here's what happened yesterday: House Republicans agreed to extend the payroll tax cut for two months. Two. Months. The road to that two-month extension was a tough one for them, and it provided a delightful, high-stakes conflict for the press, and so their ultimate capitulation is being treated as a very big deal. But they have simply punted on the payroll tax cut for 60 days. The question is what happens when those 60 days are up.One possibility is that the Republicans decide that fighting the payroll tax cut is simply too much trouble. If that's their conclusion, then the next extension might pass easily. But another possibility is that House Republicans are furious at having been forced to buckle this time, and their takeaway is that, next time, they need a better strategy, and they need to make sure Mitch McConnell and John Boehner are on the same page. In that case, the next extension will be an even heavier lift.By the same token, the lessons the Democrats' took matters, too. And that one seems easier to predict: don't spend too much time negotiating with Republicans.

Regulatory Uncertainty, Macro Policy Uncertainty, and Demand - With the Republicans in the House maximizing policy uncertainty, I think it useful to recount some of the recent research on how uncertainty is affecting output. In particular, I want to go beyond the talking point which asserts that regulatory uncertainty is depressing output (data free analysis here), given that we know empirical results asserting the level of regulation depresses output are not robust [1]. One of the recent papers attempting to measure policy uncertainty is Baker, Bloom and Davis (2011), who develop an index of economic policy uncertainty, shown below: The authors: "... construct an index from three types of underlying components. One component quantifies newspaper coverage of policy-related economic uncertainty. A second component reflects the number of federal tax code provisions set to expire in future years. The third component uses disagreement among economic forecasters as a proxy for uncertainty."

Pay gap a $740bn threat to US recovery - Jonathan Smucker felt so strongly that something was wrong at the heart of the American system that he left the small business he runs in Rhode Island and set off for New York City to take part in the Occupy Wall Street protest.  “Like a lot of Americans, I’m pretty ticked off. It’s not that there are rich people, it’s that the people with a lot of money over the past few decades have rigged the system so that there’s not a fair chance for anyone any more,” he said at the protests last week. “We are the 99%”, the slogan of Occupy Wall Street, is a reference to the rising wealth of the top 1 per cent of US income distribution. But an equally valid slogan might be: “We get 58%”. That figure is the share of US national income that goes to workers as wages rather than to investors as profits and interest. It has fallen to its lowest level since records began after the second world war and is part of the reason why incomes at the top – which tend to be earned from capital – have risen so much. If wages were at their postwar average share of 63 per cent, workers would earn an extra $740bn this year, about $5,000 per worker, according to FT calculations. This so-called labour share has been in gentle decline in most industrial economies, but especially Anglo-Saxon economies, for the last couple of decades. In this recovery, however, something strange and unprecedented is going on.

A Moral Obligation to Tax the Super Rich Much More than Currently - Linda Beale - From Brad DeLong, a further discussion of the need to hike the tax rates of the wealthy.  See The 70% Solution--Taxing the Rich Department: The superrich command and control so many resources that they are effectively satiated: increasing or decreasing how much wealth they have has no effect on their happiness. So, no matter how large a weight we place on their happiness relative to the happiness of others we simply cannot do anything to affect it by raising or lowering their tax rates. The unavoidable implication of this argument is that when we calculate what the tax rate for the superrich will be, we should not consider the effect of changing their tax rate on their happiness, for we know that it is zero. Rather, the key question must be the effect of changing their tax rate on the well-being of the rest of us. So Congress should pay attention and get tax policy right for the first time since Reagan.  We really ought to increase the taxes of the wealthy.  They won't feel the pinch anyway (except for the fact that they have all convinced themselves that it would be scandalously unfair if they had to pay taxes along the lines of the taxes under Nixon) and the vast majority of Americans would be benefitted.  What's not to like about that?

There Will Be Rich Always: Finding a New Way to Think About Income Inequality - In one of the more memorable lyrics from the musical Jesus Christ Superstar (based on Matthew 26:11), Jesus tells his disciples “There will be poor always.” The same is true of the rich. There will always be a top 1 percent of income earners. But what it takes to be rich can change drastically over the course of even a single generation. In 1980, you would have had to earn at least $158,000 to be a one-percenter; but by 2006 the qualifying amount had more than doubled to $332,000. The rise is not due to inflation as both these numbers are expressed in inflation-adjusted, constant 2006 dollars. The rise is due to the simple fact that our richest Americans in real terms were earning much more money. Over the same period the median household income remained relatively constant, at roughly $50,000. While inequality has increased in most wealthy economies, the United States, according to the OECD, remains among the most unequal. The vast shift in national income toward our richest 1 percent is especially vivid if their income is expressed in terms of the median household income. Indeed, an important goal of our op-ed was to suggest a new unit of measure, “medians” to help us think about what it means to be rich. In 1980, if you earned 3.8 medians, you were in the top 1 percent, but by 2006 even the poorest in the 1 percent club earned 6.9 medians.  What we call the “Brandeis Ratio,” the average income of the richest 1 percent (which includes the billions earned by the lucky few) has grown even more disproportionate. As shown in the chart below, in 1980, one-percenters on average made 12.5 medians, but in 2006 (the latest year in which data is available) the average income of our richest 1 percent was a whopping 36 medians.

Don’t Tax the Rich. Tax Inequality Itself. - In 1980, the wealthiest 1 percent of Americans made 9.1 percent of our nation’s pre-tax income; by 2006 that share had risen to 18.8 percent — slightly higher than when Brandeis joined the Supreme Court in 1916.  Congress might have countered this increased concentration but, instead, tax changes have exacerbated the trend: in after-tax dollars, our wealthiest 1 percent over this same period went from receiving 7.7 percent to 16.3 percent of our nation’s income.  What we call the Brandeis Ratio — the ratio of the average income of the nation’s richest 1 percent to the median household income — has skyrocketed since Ronald Reagan took office. In 1980 the average 1-percenter made 12.5 times the median income, but in 2006 (the latest year for which data is available) the average income of our richest 1 percent was a whopping 36 times greater than that of the median household. Brandeis understood that at some point the concentration of economic power could undermine the democratic requisite of dispersed political power. This concern looms large in today’s America, where billionaires are allowed to spend unlimited amounts of money on their own campaigns or expressly advocating the election of others.  We believe that we have reached the Brandeis tipping point. It would be bad for our democracy if 1-percenters started making 40 or 50 times as much as the median American.

An Inequality Tax Trigger: The Brandeis Ratio Explained - A central idea behind our Brandeis tax proposal was to have a tax that is triggered by increases in inequality. Our Brandeis tax does not target excessive income per se; it only caps inequality. Billionaires could double their current income without the tax kicking in — as long as the median income also doubles. The sky is the limit for the rich as long as the “rising tide lifts all boats.” Indeed, the tax gives job creators an extra reason to make sure that corporate wealth does in fact trickle down. But in crafting an inequality trigger we might have chosen a more traditional measure of income inequality – such as the Gini coefficient or the Herfindahl-Hirschman Index (HHI).  Any standard of inequality would show a sharp increase over the last 25 years.  In part, we choose the Brandeis ratio because we think it is more transparent. We could try to explain that the Gini number represents the ratio of two areas, including crucially the area above the Lorenz curve. The Lorenz curve is the inequality measure that Robert Shiller and coauthors use in their 2006 paper on this topic of inequality of tax triggers; they account for behavioral responses to such changes and consider how to optimally balance the benefits of lower risk and higher economic growth with the traditional negative incentive effects.  Shiller should get credit for coming up before us with the general idea of an inequality-contingent tax system.

Obama and the GOP Circus Show - Black Agenda Report - Having shown his hand over the last three years as an eager – although often spurned – partner in Republican austerity politics, and a war-maker who could make George Bush blush, President Obama will seek reelection with bankers’ money while pretending to remain “infuriated” with Wall Street. The banksters are in on the scam, since “nothing can match Obama’s crowning glory: the permanent bailout of finance capital.” The Republican candidate, whoever it is, will certainly spout an unambiguously pro-business line. But, “a GOP gaggle that savages itself for the privilege of singing the praises of the rich can only bring down the wrath of the people on the bankers’ heads.” Wall Street knows Obama is their true “shining knight.”

The plight of the 1% - Max Abelson has a fantastic column today from simply asking prominent members of the 1% about their embattled status. There’s Home Depot co-founder Bernard Marcus, who characterizes any potential critic of his wealth by asking the timeless question “who gives a crap about some imbecile?”. There’s BB&T‘s John A. Allison IV, who says that any rule requiring public companies to disclose the ratio between the compensation of their CEO and their median employee would constitute “an attack on the very productive”. And then there’s Steve Schwarzman, displaying his legendary deftness of touch in a TV interview: Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax. “You have to have skin in the game,” said Schwarzman, 64. This isn’t an “I see what you did there” moment so much as it’s a brazen decision to go on the attack against “the 47%”: Americans who earn so little money that they don’t pay federal income tax. (Of course, they still have “skin in the game”: they still pay sales tax and payroll taxes and local taxes.) 61% of these families — let’s call them the 29% — are earning less than $20,000 per year.

The One Percent Strikes Back - It's not a joke. In response to the Occupy Wall Street movement, a band of one-percenters—including JP Morgan Chase CEO Jamie Dimon, who made $23 million in 2012; and John A. Allison IV, a director of BB&T Corp.—has started a campaign to rescue rich CEOs' tattered image. Calling themselves the Job Creators Alliance, the group plans media appearances, pens op-eds, and comes up with talking points to defend executives from the 99 percent who, at least in terms of wages, has seen little trickle down from Wall Street for the last two decades. Bernard Marcus, a founding member of the alliance, isn't worried about Occupiers being offended by his organization's mission. “Who gives a crap about some imbecile? Are you kidding me?” he told Businessweek. “If I hear a politician use the term ‘paying your fair share’ one more time, I’m going to vomit," chimed in billionaire Tom Golisano.  They've come parroting the standard defense: That they deserve the money they get and that they create jobs. Problem is, as Senate Majority Leader Harry Reid said, “millionaire job creators are like unicorns, they’re impossible to find, and they don't exist." Economists, in a rare instance of consensus, agree that there is little evidence to support the claim that a change in tax rates prompts a real response from the economy..

Bankers Join Billionaires to Debunk ‘Imbecile’ Attack on Top 1% - Bloomberg -- Jamie Dimon, the highest-paid chief executive officer among the heads of the six biggest U.S. banks, turned a question at an investors’ conference in New York this month into an occasion to defend wealth.  “Acting like everyone who’s been successful is bad and because you’re rich you’re bad, I don’t understand it,” the JPMorgan Chase & Co. (JPM) CEO told an audience member who asked about hostility toward bankers. “Sometimes there’s a bad apple, yet we denigrate the whole.”  Dimon, 55, whose 2010 compensation was $23 million, joined billionaires including hedge-fund manager John Paulson and Home Depot Inc. (HD) co-founder Bernard Marcus in using speeches, open letters and television appearances to defend themselves and the richest 1 percent of the population targeted by Occupy Wall Street demonstrators.  If successful businesspeople don’t go public to share their stories and talk about their troubles, “they deserve what they’re going to get,” said Marcus, 82, a founding member of Job Creators Alliance, a Dallas-based nonprofit that develops talking points and op-ed pieces aimed at “shaping the national agenda,” according to the group’s website. He said he isn’t worried that speaking out might make him a target of protesters.  “Who gives a crap about some imbecile?” Marcus said. “Are you kidding me?”

Indignant rich round on protest movement - FT - In the face of popular fury, political invective and protest encampments on their doorsteps, the rich are fighting back in America’s new bout of class warfare.  Some of the high-profile rich, including Steve Schwarzman, John Paulson and Jamie Dimon, have sought to define the terms of a debate that will be central to next year’s presidential campaign. Under threat are what Barack Obama has described as the lowest tax rates for the wealthy since the 1950s, while a tax break enjoyed by private equity bosses and hedge fund managers will come under close scrutiny should Mitt Romney, a former private equity executive, be his Republican opponent.  But like the disparate Occupy Wall Street movement, the rich employ a variety of tactics in their defence. One is to criticise the divisive tone of the debate itself as something that violates traditional American values. Leon Cooperman, a hedge fund manager and Goldman Sachs veteran, last month attacked the populist tactics of the president in an open letter widely circulated on Wall Street. A billionaire who has joined Bill Gates and Warren Buffett in pledging to give away most of his wealth, Mr Cooperman is in favour of higher taxes and, unlike many of his peers, does not blame Mr Obama for economic woe.  Instead he wrote: “What I can justifiably hold you accountable for is your and your minions role in setting the tenor of the rancorous debate now roiling us that smacks of what so many have characterised as ‘class warfare’.”

Dear Jamie Dimon - I am writing to profess my utter disbelief at how little you seem to understand the current mood of the nation.  In a story at Bloomberg today, you and a handful of fellow banker and billionaire "job creators" were quoted as believing that the horrific sentiment directed toward you from virtually all corners of America had something to do with how much money you had. I'd like to take a moment to disabuse you of this foolishness. America is different than almost every other place on earth in that its citizenry reveres the wealthy and we are raised to believe that we can all one day join the ranks of the rich. The lack of a caste system or visible rungs of society's ladder is what separates our empire from so many fallen empires throughout history. In a nation bereft of royalty by virtue of its republican birth, the American people have done what any other resourceful people would do - we've created our own royalty and our royalty is the 1%. Not only do we not "hate the rich" as you and other em-bubbled plutocrats have postulated, in point of fact, we love them. We worship our rich to the point of obsession. The highest-rated television shows uniformly feature the unimaginably fabulous families of celebrities not to mention the housewives (real or otherwise) of the rich. We don't care what color they are or what religion they practice or where in the country they live or what channel their show is on - if they're rich, we are watching.

Study: Wealth Inequality In America May Be Worse Than It Was In Ancient Rome - The 99 Percent Movement effectively changed the American political debate from debt and deficits to income inequality, highlighting the fact that income inequality has increased so much in the U.S. that it is now more unequal than countries like Ivory Coast and Pakistan. While those numbers are startling, a study from two historians suggests that American wealth inequality may actually be worse than it was in Ancient Rome — a society built on slave labor, a defined class structure, and centuries of warfare and conquest.In the United States, the top 1 percent controls roughly 40 percent of the nation’s wealth. According to the study, which examined Roman ledgers, previous estimates, imperial edicts, and Biblical passages, Rome’s top 1 percent controlled less than half that at the height of its economic power, as Tim De Chant notes: Their target was the state of the economy when the empire was at its population zenith, around 150 C.E. Schiedel and Friesen estimate that the top 1 percent of Roman society controlled 16 percent of the wealth, less than half of what America’s top 1 percent control.

Income inequality in the Roman Empire - Over the last 30 years, wealth in the United States has been steadily concentrating in the upper economic echelons. Whereas the top 1 percent used to control a little over 30 percent of the wealth, they now control 40 percent. It’s a trend that was for decades brushed under the rug but is now on the tops of minds and at the tips of tongues. Since too much inequality can foment revolt and instability, the CIA regularly updates statistics on income distribution for countries around the world, including the U.S. Between 1997 and 2007, inequality in the U.S. grew by almost 10 percent, making it more unequal than Russia, infamous for its powerful oligarchs. The U.S. is not faring well historically, either. Even the Roman Empire, a society built on conquest and slave labor, had a more equitable income distribution. To determine the size of the Roman economy and the distribution of income, historians Walter Schiedel and Steven Friesen pored over papyri ledgers, previous scholarly estimates, imperial edicts, and Biblical passages. Their target was the state of the economy when the empire was at its population zenith, around 150 C.E. Schiedel and Friesen estimate that the top 1 percent of Roman society controlled 16 percent of the wealth, less than half of what America’s top 1 percent control.

Even The Ancient Roman Empire Wasn't As Unequal As America Today - Some 1,500 years after the fall of the Roman Empire, the supposedly advanced and progressive United States of America is plagued by even worse income inequality. Tim De Chant at Per Square Mile reached this conclusion based on a study by historians Walter Schiedel and Steven Friesen. Rome's top 1% controlled 16 percent of the wealth, compared to modern America where the top 1% controls 40 percent of the wealth. Looking at the Gini coefficient, where 0 means perfect equality and 1 means perfect inequality, Rome measured between 0.42 and 0.44. Modern America scores worse at 0.45, and some areas are much worse like Fairfield County, Conn. with an alarming 0.54. De Chant comments on a telling line from the essay by Shiedel and Friesen: [A]t the end, they make a point that’s difficult to parse, yet provocative. They point out that the majority of extant Roman ruins resulted from the economic activities of the top 10 percent. “Yet the disproportionate visibility of this ‘fortunate decile’ must not let us forget the vast but—to us—inconspicuous majority that failed even to begin to share in the moderate amount of economic growth associated with large-scale formation in the ancient Mediterranean and its hinterlands.”

Rich People Lack Empathy, Study Finds - Social psychologists are making an argument that Occupy Wall Street protesters have been saying for months: Many rich people just aren't in the habit of thinking of others. According to researchers at the University of California-Berkeley, people who grew up in economically comfortable circumstances are less attuned to the suffering of other people. In multiple trials that involved both questionnaires and physical-response tests, the researchers found that young adults whose upbringing involved some degree of financial struggle were quicker and more likely to register signs of empathy than young adults who came from affluent backgrounds. Such conclusions are especially relevant now, as the Occupy movement continues to focus national attention and criticism on the growing divide between rich and poor. The findings of the UC Berkeley team seem to suggest that this might be true, though the researchers make a point of saying it's likely the result of inexperience on the part of the rich, not necessarily malice. "It's not that the upper classes are coldhearted," Jennifer Stellar, a social psychologist at UC Berkeley and the lead author of the study, is quoted as saying in a press release. "They may just not be as adept at recognizing the cues and signals of suffering because they haven’t had to deal with as many obstacles in their lives."

What Have the Rich Ever Done For Us? - In a column titled “The Plight of the 1%,” Felix Salmon aptly demonstrates that very rich people whining about how much they pay in taxes come across as churlish, indeed. Whatever the merits of their arguments, attacking those far beneath them on the economic ladder is unseemly. Of an extraordinarily successful investor who recently complained about the 45 percent of Americans who pay no federal income tax, Salmon notes that 61 percent of said individuals earn under $20,000 a year whereas said CEO is worth almost $6 billion. Doing the math, he points out “that works out at $20,000 an hour, every hour of every day, even when he was sleeping, since the day he started working.” Again, whatever the merits of that degree of earning disparity, it’s probably best to leave that argument to someone else.

Pathetic Plutocrats - Krugman - One of the disadvantages of being very wealthy may be that you end up surrounded by sycophants, who will never, ever tell you what a fool you’re making of yourself. That’s the only way I can make sense of the farcical behavior of the wealthy described in this new report from Max Abelson: Cooperman, 68, said in an interview that he can’t walk through the dining room of St. Andrews Country Club in Boca Raton, Florida, without being thanked for speaking up. At least four people expressed their gratitude on Dec. 5 while he was eating an egg-white omelet, he said. “You’ll get more out of me,” the billionaire said, “if you treat me with respect.” What’s truly amazing is that they’re hearing things that aren’t actually being said. Obama and others say that the rich have had huge income gains relative to everyone else, so they should be asked to pay somewhat higher taxes; the rich hear that and it comes out “you are all evil”. What I want to know is, how did these people get where they are with such incredibly thin skins? Can you become a Master of the Universe while screaming “Ma, he’s looking at me funny!” at every hint of criticism?

Why Not Plutocracy: Apathy Runs Deep Edition - Long time readers know that one of my big questions is why Plutocracy cannot be made to work. In particular, I wonder why society ruled by the owners of land combined with a “no serfdom” condition, doesn’t produce great outcomes. We can argue over whether “no serfdom” is a stable equilibrium, but in the sweep of history so far all other arrangements are consistently beat out by liberal democracies which are a far, far cry from this.Most of the standard answers to this I find interesting but unsatisfying, though if folks want to argue for them in the comments feel free. Increasingly, however, I think it has something to do with the problem Paul Krugman outlines here. One of the disadvantages of being very wealthy may be that you end up surrounded by sycophants, who will never, ever tell you what a fool you’re making of yourself. That’s the only way I can make sense of the farcical behavior of the wealthy described in this new report from Max Abelson: The lesson I would take is as follows. Profit or consumption maximizing incentives are just incredibly weak. We think we see consumption incentives in the general populace but we are really seeing status seeking. Folks earn or consume more in an effort to raise their status relative to others.

The Corporations That Occupy Congress - Some of the biggest companies in the United States have been firing workers and in some cases lobbying for rules that depress wages at the very time that jobs are needed, pay is low, and the federal budget suffers from a lack of revenue.Last month Citizens for Tax Justice and an affiliate issued Corporate Taxpayers and Corporate Tax Dodgers 2008-10. It showed that 30 brand-name companies paid a federal income tax rate of minus 6.7% on $160 billion of profit from 2008 through 2010 compared to a going corporate tax rate of 35%. All but one of those 30 companies reported lobbying expenses in Washington. Another report, by Public Campaign, shows that 29 of those companies spent nearly half a billion dollars over those three years lobbying in Washington for laws and rules that favor their interests. ... The report – “For Hire: Lobbyists or the 99 percent” – says that while shedding jobs, the 30 companies are “spending millions of dollars on Washington lobbyists to stave off higher taxes or regulations. Company reports to shareholders show that among the 30 companies in the Public Campaign report, the 10 firms that spent the most on lobbying during the same three-year period fired more than 93,000 American workers. ...

Cutting the Corporate Tax Rate Is No Economic Panacea - Last week, a nice woman contacted me to see if I was interested in the work of a bipartisan coalition she worked for that was promoting a cut in the corporate tax rate. I told her that I was disinclined to believe that it would have much impact but didn’t take the time to explain why. This is why. First, insofar as taxes affect businesses, more than 90 percent of businesses are not really affected by the corporate tax. They are sole proprietorships, partnerships or S corporations that are essentially taxed only on the individual tax schedule. The corporate tax affects only C corporations, legal entities separate and distinct from their owners, the shareholders. The income of C corporations is taxed twice – once at the corporate level and again when the corporation’s income is paid out to its owners. Those advocating a cut in the corporate tax rate today generally ignore the tax on dividends, as well as many other provisions of United States and foreign tax law that may reduce the effective tax rate well below the statutory rate.A recent study found that only 25 percent of the largest American corporations pay anywhere close to the statutory corporate tax rate of 35 percent on their earnings, while 40 percent pay less than half that rate.

Fed proposes new bank capital rules - The US Federal Reserve has proposed new rules requiring the largest financial firms to hold more capital and detailed for the first time since the financial crisis how the central bank will deal with giant banks in distress whose failure could threaten financial stability. The biggest banks will be required to achieve a 9.5 per cent ratio of core capital to risk-weighted assets by 2019 as part of the so-called Basel III reforms, the Fed announced on Tuesday, in an expected move that mirrors proposals by a group of global banking regulators known as the Basel committee.The rules would apply to all US banks with more than $50bn in assets, but the highest capital ratios would be reserved for the largest of the big banks. JPMorgan Chase, Citigroup and Bank of America are among the companies expected to be hit with the most stringent capital requirement. Foreign banks with large US operations were spared from the proposed regulations. The Fed said it will issue separate rules for the roughly 100 foreign-based financial institutions at a later, unspecified date. The draft rules also call for heightened liquidity requirements, greater risk management responsibilities for bank boards of directors, tougher restrictions on counterparty exposure between financial companies with more than $500bn in assets and a four-level road map for large distressed companies to be resolved.

Fed Proposes New Capital Rules for Banks - The Federal Reserve on Tuesday proposed rules that would require the largest American banks to hold more capital — and to keep it more easily accessible — to protect against another financial crisis. But the Fed, the nation’s chief banking regulator, added that the final capital rules were unlikely to be more stringent than international limits that were still under development. That is a small victory for banks who warned that they would be severely disadvantaged if capital requirements here were stricter than those governing overseas banks. Bank representatives are still wary about details that remain to be worked out, however, including how much of an extra capital cushion would be imposed on the biggest of the big institutions like Bank of America, JPMorgan Chase and Citigroup. In a 173-page proposal that tied to the Dodd-Frank regulatory law passed last year, the Fed also proposed formal limits on the amount of credit exposure that a bank holding company can have to any major borrower, be it another bank or corporation. The goal is to prevent one bank from being susceptible to failure because of a relationship with another large institution. The lack of a cash cushion in the 2008 financial crisis caused many firms to try to rapidly unwind transactions that had troubled institutions on the other side of them, worsening a partner’s troubles and accelerating the market’s crash. 

The U.S. Federal Reserve Lets Big Banks Off The Hook… Again - We’ve told you before that the U.S. Federal Reserve puts Wall Street’s interest above that of the American public. And yesterday (Wednesday) the central bank proved it… again.Confronted with the opportunity to enact meaningful change to the regulatory system, the Fed punted on its responsibility to protect the public from the very banks that brought down the global economy. This once again proves that the Fed, far from being a guardian of public welfare, is actually on the side of big banks. “The Fed is an agent of the banks and, as such, it continues to come up with new ways for them to make money, risk free,” said Money MorningCapital Waves Strategist Shah Gilani. This time, instead of proposing strong guidelines that would actually do something to avoid another crisis caused by too-big-to-fail banks, the Fed put forth a plan that lacks key details and leaves important decisions in the hands of international regulators in Basil, Switzerland. Specifically, the Fed proposal is hazy on capital requirements and minimum liquidity levels, which are crucial to ensuring a bank survives a financial emergency.

Real Reasons Bankers Don’t Like Basel’s Rules: Clive Crook - Why bankers' whining about higher equity requirements is just that: A much-cited paper by Stanford’s Anat Admati and colleagues -- “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive” -- should have ended this debate once and for all. It dismantles the banks’ position step by painstaking step. The study makes the crucial distinction between the interests of bank managers, bank shareholders and the public at large. Managers are being disingenuous. They do have reasons, valid after a fashion, for opposing higher capital requirements, just not reasons they can admit. The one they emphasize -- cost of funding and its effect on future lending -- is fit for public use, but bogus. What might their real reasons be? If banks sell more shares, it’s true that the return on equity will fall. If managers’ pay is tied to return on equity (as it often is), they will be worse off. Shareholders, on the other hand, shouldn’t mind, because the risk of their investment is reduced in proportion. Taxpayers, of course, would be better off -- less likely to be stuck at some point with the cost of bailing out the bank. The paper is here.

GOP uses purse strings to rein in Dodd-Frank - The White House managed to squeeze out some concessions from Republicans on funding Wall Street reform in the 2012 budget agreement that the House passed this afternoon. But Democrats ultimately failed to obtain an overall funding increase for one of the main financial watchdogs whose responsibilities will be massively expanded under Dodd-Frank. Under the new deal, the Commodities Futures Trading Commission will get $10 million more for staffing, thus making layoffs for the agency less likely in 2012. But that money won’t come through a funding increase: In the end, Republicans refused to budge on the overall funding level for the agency, which will stay at $205 million. Instead, $10 million for staffing will be shifted out of the agency’s budget for information technology. The overall level of funding falls significantly short of President Obama’s own request for the CFTC — $308 million, which would be an increase of almost 50 percent — as well as the Senate Democrats’ request for $240 million.

Why Are We Forced to Worship at the Feet of ‘Mythical’ Financial Markets Controlled by the Elite? - The markets are “jittery,” “upset,” “skittish” and “unnerved.” They are “confident” or “unsure.” They are “demanding” that political leaders “put up or shut up.” And they are “reacting unfavorably” to Obama’s newfound populism. These are just a few of the many ways financial markets are described each and every day by the media, financial players and public officials. At first it seems as if these markets are humanoids onto which we project our feelings. Yet, on closer inspection, it’s more like we have ascribed to them god-like powers. We are told to appease the market gods or face eternal financial damnation. As President Obama warned Europe recently, they must “muster the political will” to “settle markets down.” Why do we worship these angry market gods?

No One Is Above the Law - Simon Johnson - The American ideal of equal and impartial justice under law has repeatedly been undermined by attempts to concentrate power. Our political system has many advantages, but it also provides motive and opportunity for resourceful people to become so strong they can elude the legal constraints that bind others. The most obvious example is the oil and railroad trusts at the end of the 19th century. A version of the same process is happening again today, but what has become concentrated is not a vital energy source or the nation’s transport arteries but rather something much more abstract – financial sector risk. In early 2009, Treasury Secretary Timothy F. Geithner reportedly said to President Obama and senior members of the new administration, with regard to the financial system: The confidence in the system is so fragile still. The trust is gone. One poor earnings report, a disclosure of a fraud, or a loss of faith in the dealings between one large bank and another — a withdrawal of funds or refusal to clear trades — and it could result in a run, just like Lehman.Three years later, the megabanks are even bigger, as is the risk they concentrate (see my recent testimony to the financial institutions subcommittee of the Senate Banking Committee for details). Curiously, their precariousness, as much as their power, is shielding these behemoths from the enforcement of financial fraud laws.

Bill Black: On the Incidence of Fraud Leading to the Crisis, the Absence of Prosecutions, Dodd Frank, and What Must Happen Now - This is one of the best Bill Black interviews to date (care of Jim Puplava). These selected notes just scratch the surface. I recommend listening to the entire interview or reading the full transcript (below). How do we make this required listening for every American? Link to interview (mp3) Link to full transcript

How the Public Misses Out on How Fights Over Bank Regulations Affect Them - 12/23/2011 - Yves Smith - The public keeps losing and losing and losing to big finance because financiers have made an art form of using complexity, opacity, and leverage to cover their tracks.  The last example comes in an anodyne-seeming article in the Financial Times about collateralized loan obligations, or CLOs. CLOs are a structured credit product, in this case, made from leveraged (as in risky) corporate loans. Think of it as the corporate lending analogy to subprime bonds. The major differences between CLOs and RMBS are that CLOs are not secured by collateral (houses) and that CLOs turned out to be much better diversified than RMBS (the mortgage bond designers thought that a geographic mix would provide adequate diversification, since the modern US had never suffered a nation-wide housing market price decline. Whoops!) CLO volumes exploded in the runup to the crisis due to a cheap-debt-fueled M&A boom, with private equity firms the big source of increased deal demand. And when the music stopped, the big banks were stuck with lots of unsold inventory.Now the banks seem to have amnesia as far as the crisis is concerned, but US regulators (at least for the moment) have taken an uncharacteristic interest in reducing the risks banks carry, including those of CLOs. But the unfortunate aspect of the discussion in the Financial Times, and we assume elsewhere, is that this issue is being framed too narrowly, as being a matter of bank and financial system safety. Absent is the notion of the societal cost of making cheap debt too readily available to what in the 1980s were called takeover artists.

US Federal Regulatory Budget and Macroeconomic Outcomes: What Do We Know? - There has been a lot of debate lately about the costs of regulation for the US economy. In a Regulatory Policy Commentary posted on December 19th, Kathryn Vesey, a research associate at the GW Regulatory Studies Center, and I discuss our preliminary findings from a study of the macroeconomic impacts of changes in the “regulators’ budget,” i.e. the part of the US federal government budget allocated to developing and enforcing federal regulations. We were inspired to take on our study by a policy bulletin from the Phoenix Center. They argue that federal regulatory expenditures are an enormous drag on the US private sector macroeconomy. Their abstract reports the following findings: “Even a small 5% reduction in the regulatory budget (about $2.8 billion) is estimated to result in about $75 billion in expanded private-sector GDP each year, with an increase in employment by 1.2 million jobs annually. On average, eliminating the job of a single regulator grows the American economy by $6.2 million and nearly 100 private sector jobs annually. Conversely, each million dollar increase in the regulatory budget costs the economy 420 private sector jobs.” Not surprisingly, these results have caught the attention of people concerned about federal regulatory spending, such as in this blog by House Majority Leader Eric Cantor and this Statement of Judiciary Committee Chairman Lamar Smith. We wondered, however, how sensitive the findings might be to different specifications.

Global savings glut or global banking glut? - It has become commonplace to assert that current-account imbalances were a key factor in stoking subprime lending in the US. This column says the ‘global banking glut’, i.e. the rise in cross-border lending, may have been more culpable for the crisis than the ‘global savings glut’. As the European banking crisis deepens, the deleveraging of the European global banks will have far-reaching implications not only for the Eurozone, but also for credit supply conditions in the US and capital flows to the emerging economies.

Global Savings Glut or Global Banking Glut? - - Yves Smith  -  It has been striking how little commentary a BIS paper by Claudio Borio and Piti Disyatat, “Global imbalances and the financial crisis: Link or no link?” has gotten in the econoblogosphere, at least relative to its importance. As most readers probably know, Ben Bernanke has developed and promoted the thesis that the crisis was the result of a “global savings glut,” which is shorthand for the Chinese are to blame for the US and other countries going on a primarily housing debt party. This theory has the convenient effect of exonerating the Fed. It has more than a few wee defects. As we noted in ECONNED: The average global savings rate over the last 24 years has been 23%. It rose in 2004 to 24.9%. and fell to 23% the following year. It seems a bit of a stretch to call a one-year blip a “global savings glut,” but that view has a following. Similarly, if you look at the level of global savings and try deduce from it the level of worldwide securities issuance in 2006, the two are difficult to reconcile, again suggesting that the explanation does not lie in the level of savings per se, but in changes within securities markets.Similarly, the global savings glut thesis cannot explain why banks created synthetic and hybrid CDOs (composed entirely or largely of credit default swaps, which means the AAA investors did not lay out cash for their position) which as we explained at some length, were the reason that supposedly dispersed risks in fact wound up concentrated in highly leveraged financial firms.

Guest Post: Jon Corzine, MF Global, And Unaccountability - In April 2007, former New Jersey governor, 'honorable', Jon Corzine had an altercation with a Garden State Parkway guardrail. A year later, he addressed a bevy of reporters at the swanky Drumthwacket mansion and expressed appreciation for “family, friends, and the fragility of life.” During his recovery period, he advocated seatbelt safety, before returning to New Jersey's budget, extracting $500 million in austerity measures from farmers, educators, and environmentalists, and hiking tolls on New Jersey roadways. On the one-year anniversary of his accident, his chief-of-staff, Bradley I. Abelow declared,  “Corzine has returned to his former self as a thorough and exacting boss.” (Italics mine.) Fast forward to the current MF Global flameout. Abelow shifted to Corzine’s Chief Operating Officer. And not only did Corzine ratchet up the ante on ways to really piss off farmers, but after several days of engaging in verbal dodge ball with Congress, this ‘thorough and exacting boss’ maintained his Forest Gump type cloak of secrecy regarding the stolen $1.2 billion of his customers’ segregated money.

Trustee to Seize and Liquidate Even the Stored Customer Gold and Silver Bullion From MF Global - The bottom line is that apparently some warehouses and bullion dealers are not a safe place to store your gold and silver, even if you hold a specific warehouse receipt.  In an oligarchy, private ownership is merely a concept, subject to interpretation and confiscation. Although the details and the individual perpetrators are yet to be disclosed, what is now painfully clear is that the CFTC and CME regulated futures system is defaulting on its obligations.  This did not even happen in the big failures like Lehman and Bear Sterns in which the customer accounts were kept whole and transferred before the liquidation process.    Obviously holding unallocated gold and silver in a fractional reserve scheme is subject to much more counterparty risk than many might have previously admitted. If a major bullion bank were to declare bankruptcy or a major exchange a default, how would it affect you? Do you think your property claims would be protected based on what you have seen this year?

Investors are furious that they can't get back the gold and silver they stashed with the failed brokerage. It's one thing for $1.2 billion to vanish into thin air through a series of complex trades, the well-publicized phenomenon at bankrupt MF Global. It's something else for a bar of silver stashed in a vault to instantly shrink in size by more than 25%. That, in essence, is what's happening to investors whose bars of silver and gold were held through accounts with MF Global. The trustee overseeing the liquidation of the failed brokerage has proposed dumping all remaining customer assets—gold, silver, cash, options, futures and commodities—into a single pool that would pay customers only 72% of the value of their holdings. In other words, while traders already may have paid the full price for delivery of specific bars of gold or silver—and hold "warehouse receipts" to prove it—they'll have to forfeit 28% of the value.

Guess Where a Big Chunk of MF Global Customer Money Just Turned Up? At JPM London - Let's see. MF transferred $200 million to their clearing bank JP Morgan in London three days before their bankruptcy according to the WSJ. Dealbook says it was on the LAST business day. And it took the regulators THIS long to find it? And allegedly at the time JPM London suspected that the money might be coming from the customer accounts. I wonder why that would occur to them? Read this carefully. The spin is there but the truth is beneath the surface of sugar frosting and distracting swirls of fluff, and the decorations carved from baloney that have marked this story from day one. This could be a misdirection. I wondered if this was money to cover the bonuses to the London MF staff, but they were paid the day before the bankruptcy. Nothing like making a find and then being able to dismiss it. At the end of the day, I think the regulators have known where the money went for some time now. The problem is that the parties who received it won't admit it and give it back, and they have powerful friends. And there is a greater scandal floating beneath the surface. Maybe involving someone big enough to rig a global market or two.

Reforming Repo Rules - Sometimes, we just don’t learn. After the financial crisis, the United States enacted the Dodd-Frank Act to overhaul American financial regulation, with the aim of reducing the risk of another financial meltdown. But it did nothing to reform “repo” lending – arguably the weakest link in the financial chain. And we have just seen another major financial firm collapse as a result. A repo, or repurchase agreement, is a sale of a security (often a US Treasury obligation) that the seller promises to buy back later – often the day following the original sale – at a slightly higher price. The repo buyer thus lends to the seller, with the difference between the immediate “spot” price of the obligation and the “forward” repurchase price representing the interest on the loan. These repo loans give firms – typically financial firms – access to vast pools of cheap financing (often emanating from US money-market funds). It is a market measured in the trillions of dollars. MF Global, the global financial firm that filed for bankruptcy in October, is just the most recent noteworthy example of how repo lending can go wrong.  Repo debt seems to have made up an astounding one-half of MF Global’s balance sheet. The rules of the financial game privilege repo financing over other kinds, and Dodd-Frank did nothing to fix this. First, normal bankruptcy rules don’t apply to repos. Second, much repo financing flows into large risk-taking financial firms like MF Global, Lehman, and Bear Stearns through money-market funds, which must invest very short-term, because their depositors want immediate liquidity.

Mark Faber: "I Am Convinced The Whole Derivatives Market Will Cease To Exist And Will Go To Zero" - Anyone seeking joyous holiday greetings and cheerful forecasts for the new year is advised to avoid the following most recent Mark Faber interview, in which in addition to his predictions for 2012 (led with "more printing" by the dodecatupling down central planners, and far less prosperity), we get the following: "I am convinced the whole derivatives market will cease to exit. Will become zero. And when it happens I don't know: you can postpone the problems with monetary measures for a long time but you can't solve them... Greece should have defaulted - it would have sent a message that not all derivatives are equal because it depends on the counterparty." And on the long-term future: "I am ultra bearish. I think most people will be lucky if they still have 50% of their money in 5 years time. You have to have diversification - some real estate in the countryside, some gold and some equities because if you think it through, say Germany 1900 to today, we had WWI, we had hyperinflation, WWII, cash holders and bondholders they lost everything 3 times, but if you owned equities you'd be ok. In equities in general you will not lose it all, it may not be a good investment, unless you put it all in one company and it goes bankrupt." As for gold: "I am worried that one day the government will take it away."

Satyajit Das on What Went Wrong With Finance - (6 part INET video) Rob Johnson interviewed world renowned derivatives expert Satyajit Das on the evolution of modern finance. As Das recounts, he got in more or less on the ground floor as sophisticated new products and modeling techniques were introduced. Although Das is wry and understated in his criticisms, he is clearly skeptical of how the financial services industry has evolved.

How Pay-Pal Squeezes Merchants with Unfair and Likely Illegal Business Practices - With PayPal, Sauter was able to process credit card transactions quickly and at reasonable rates. And it was easy to sign up for, perfect for his growing company, which designs Facebook marketing campaigns. More importantly, customers demanded it. In exchange for the service, Sauter paid 2.2 percent of each transaction to PayPal, along with a $30-per-month fee, totaling about $5,400 over the life of the account. For four years, everything worked. But when he checked his account on September 3, he found an unwelcome surprise. Instead of the nearly $2,600 he expected, his available balance was only $192, with $2,399 listed as “pending.” PayPal was reserving 30 percent of the value of each of his transactions for 90 days. The reserve was applied retroactively, creating a sudden cash-flow problem that threatened to shut him down or force him to take on expensive and otherwise-unnecessary loans.

Missouri, payday-lending haven - Is there an expert out there on the subject of payday lending in Missouri? It certainly seems to be something of a haven for payday lenders, despite the state’s attempts to paint itself as a strict regulator: Sections 408.500-408.505 subject this type of lender to a host of consumer safeguards, i.e., places a 75% cap on interest and fees on the initial loan and renewals, limits renewals to no more than six, limits the term of the loan to 14-31 days, applies daily interest calculations, etc. These sections contain some provisions which go well beyond most “consumer protections”. I’m not sure why the Missouri Division of Finance is so defensive, here, or why it feels the need to put the phrase “consumer protections” in scare quotes. But the fact is that in 2011, some 2.43 million payday loans were made — this in a state with a population of less than 6 million — and the average APR on those loans was an eye-popping 444%. So it’s easy to see why consumer groups are pushing a law capping interest rates at 36%, and why payday lenders are opposing it. The details here aren’t pretty. First of all, look what’s been happening to the payday lending industry over the past eight years, according to the state’s own figures.

A Former Treasury Adviser On How To Really Fix Wall Street - Any serious program for Wall Street reform should start with two words: “term out.” “Terming out” is a financial term of art, but its meaning is easily grasped. It simply means funding your business with long-term financing instead of short-term IOUs. To a far greater extent than is commonly understood, our financial sector funds its operations with extremely short-term borrowings. These IOUs must be paid back in a day, a week, or a month. By contrast, termed-out financial firms shun borrowings that come due in less than a year. A terming-out requirement would be costly for Wall Street, but the reward would be a safer and more resilient financial system. That’s a trade we should be willing to make. Short-term borrowings are fragile. Like a weak immune system, these fragile borrowings turn otherwise manageable challenges into life-threatening situations. Our financial system can deal with the occasional boom and bust without much of a problem. What it can’t handle—what sends the financial system and the economy into a tailspin—is a financial panic. And, by definition, a panic is about short-term IOUs. In a panic, short-term lenders abruptly stop rolling over their IOUs. The financial sector, which relies heavily on these borrowings, then goes into cash-hoarding mode. It stops making loans and buying securities. Consequently, consumers and businesses can’t get credit on reasonable terms. They reduce their spending, and the economy stalls. The resulting slump can last for years—long after the financial sector has stabilized.

When Do Trading Frictions Increase Liquidity? - NY Fed  - Trades in over-the-counter (OTC) markets are negotiated directly between a buyer and seller, in contrast to trades in an exchange, where an electronic facility automatically matches the bids and offers of many buyers and sellers. Examples of OTC markets include those for mortgage-backed securities, derivatives, corporate bonds, bank loans, and small-capitalization equity. Over the past twenty-five years, OTC markets have experienced rapid development and have grown enormously in terms of size and importance. For example, the notional amounts outstanding of only OTC derivatives exceeded $600 trillion at the end of 2009, according to the September 2010 BIS Quarterly Review.Economists tend to assume that frictions that limit trading in financial markets reduce liquidity and lower investor welfare. In this blog I discuss a recent staff study of mine that challenges that conventional wisdom. I explain how introducing trading frictions—such as circuit breakers—that slow or halt trading in an over-the-counter market experiencing a fire sale might, paradoxically, lead to higher liquidity and investor welfare.

Hedge fund restrictions favor managers over investors - Armed with insider knowledge, managers of share-restricted hedge funds sell off their own holdings ahead of their investors in order to avoid low returns produced by an outflow of shareholder dollars, according to a new study by researchers from Boston College and EDHEC Business School in France. The practice, known as front running, pits the interests of managers against those of investors in hedge funds where shareholder actions are limited by contract and there is scant disclosure of fund details. Managers act in advance on the information they possess, and can pass it along to preferred clients to shield them from declining returns, which the researchers say can be predicted by the flow of funds.Analyzing rarely-seen data from the privately held funds, Boston College Professor of Finance Ronnie Sadka and EDHEC researcher Gideon Ozik identified 56 events where managers reduced their holdings, actions that were subsequently followed by a significant out flow of other investors' money. Further studying a larger sample of thousands of funds, the researchers conservatively estimated that managers in the hedge fund industry could have effectively sheltered approximately $2.4 billion dollars from reduced returns that Sadka and Ozik say are directly linked to the withdrawal of investor dollars from a hedge fund.

Europe debt crisis poses risk to U.S. banks: Fed paper (Reuters) - The European debt crisis puts U.S. banks at risk of financial contagion, and a "disorderly outcome" threatens the ongoing U.S. economic recovery, the San Francisco Federal Reserve Bank said in a research note on Monday. If Europe's debt problems remain contained across the Atlantic, the U.S. economy will likely grow at a 2.9 percent pace this quarter, falling back to 2.4 percent next year and picking up again to 3.1 percent in 2013, wrote Sylvain Leduc, a research adviser at the San Francisco Fed. Inflation, he wrote, should settle at about 1.5 percent next year and 2013, undershooting the Fed's preferred target of 2 percent or a bit below. The European debt crisis, however, "poses a substantial downside risk to our forecast," Leduc wrote. "U.S. banks have mostly shed their direct exposure to European sovereign debt," Leduc wrote in the regional bank's latest FedViews publication. "But they remain subject to the risk that European trading counterparties might not be able to meet their obligations." In addition, if the European bank crisis is not contained, banks could face a deepening liquidity crunch. "Such acute financial distress could derail the ongoing U.S. recovery," he wrote.

Markets Unprepared for Euro Zone Default, JPMorgan’s Staley Says - The U.S. and European financial markets aren’t equipped to handle a default by Greece or other countries in the euro zone, said Jes Staley, chief executive officer of JPMorgan Chase & Co. (JPM)’s investment-banking unit. “What’s going on with sovereign debt in Europe is very troubling,” Staley said on Bloomberg Television’s Inside Track With Erik Schatzker. He said it was “not a good thing” when German Chancellor Angela Merkel asked banks to voluntarily write down their Greek sovereign debt earlier this year. “Raising the notion that a European government or any government would actually back away from its obligations is something that the market really is not set up to deal with,” Staley said. “Once you establish that a country in the euro zone can walk away from its debt obligations where does it stop?”

Zerohedge: Death By a Thousand Cuts - That's the word this morning from Societe Generale, who titled their Global Earnings Estimates Analysis: "Death by a thousand cuts; double digit downgrades for Eurozone and Japan" and included this spiffy graph to make the point that we are now about to cross back into the negative earnings zone that has, in the past, been a great indicator that we were about to have a HORRIFIC market correction.   Per Barry Ritholtz, the "highlights" of the report were: 

    • • Recent earnings forecasts cut by 4.9% and 6.9% for 2011 and 2012, respectively.
    • • Severe downgrading of both 2011 and 2012 consensus forecasts, with Japan and the Eurozone seeing double-digit percentage cuts to next year’s earnings;
    • • US stands out with only minor cuts to 2012 forecasts.

Doug Kass Rips Off a Primal Scream at Europe - Doug Kass, who typically has a sunny disposition to match his Palm Beach home, even when he is being bearish, today pulls out a can of New York to spray on the policy makers in Europe. The entire note in full below — parental guidance suggested: I get it, the world is flat. I have read Tom Friedman. I recognize that no nation is an island and we are all economically interconnected, but, seriously? A bunch of Europeans are upsetting a stabilized-to-improving situation in the United States’ economy, creating a real threat of a worldwide economic double-dip and hurting our stock market. Like I give a crap about a bunch of German leaders who are intransigent and dogmatic in policy and are dangerously bullying the rest of the EU? As for the French, they are governed by a bunch of socialists in the Senate — they don’t believe in capitalism to begin with. German and French leaders and central bankers should all be given an ultimatum by our leaders: Immediately reverse your “tame and timid” approach to your debt crisis and replace it with “shock and awe” before the debt contagion spreads to others’ shores. There. I said it. I and a lot of other Americans are getting really pissed off.

Austerity and the Modern Banker, by Simon Johnson - Santa Claus came early this year for four former executives of Washington Mutual (WaMu), a large US bank that failed in fall 2008. The Federal Deposit Insurance Corporation (FDIC) had brought a lawsuit against the four, actions that included taking huge financial risks while “knowing that the real estate market was in a ‘bubble.’” The FDIC sought to recover $900 million, but the executives have just settled for $64 million, almost all of which will be paid by their insurers; their out-of-pockets costs are estimated at just $400,000.  But, according to the FDIC, the four still earned more than $95 million from January 2005 through September 2008. So they are walking away with a great deal of cash. ... At the same time, their actions – and similar actions by other bankers – are directly responsible for both the run-up in housing prices and the damaging collapse that followed..., including through the loss of more than eight million jobs. It is also leading to austerity – taxes are increasing and government spending is falling at the local and state level around the country.  Precipitate austerity is hardly likely to help the economy find its way back to higher employment levels. Big banks represent the ultimate in concentrated economic power in today’s economies. They are able to resist all meaningful reform that could really change their compensation schemes. Their executives want to get all the upside while facing none of the true downside.

Obama and the Rule of Law - The President is confusing "legal" with "difficult to prosecute successfully." The Justice Department's repeated decisions not to risk losing at trial against Wall Street executives don't make these person's actions legal. (If a district attorney can't prove the actual thief stole your wallet, that doesn't make stealing legal. It simply means that, regrettably, a malefactor goes unpunished.) As Securities and Exchange Commission Enforcement Director Robert Khuzami said in Senate testimony in 2009, Wall Street perpetrators "are smart people who understand that they are crossing the line" and "are plotting their defense at the same time they're committing their crime."Moreover, the President is misleading us when he says that Wall Street firms violate anti-fraud law because the penalties are too weak. Repeat financial fraudsters don't pay relatively paltry -- and therefore painless -- penalties because of statutory caps on such penalties. Rather, regulatory officials, appointed by Obama, negotiated these comparatively trifling fines. This week, the F.D.I.C. settled a suit against Washington Mutual officials for just $64 million, an amount that will be covered mostly by insurance policies WaMu took out on behalf of executives, who themselves will pay just $400,000. And recently a federal judge rejected the S.E.C.'s latest settlement with Citigroup, an action even the Wall Street Journal called "a rebuke of the cozy relationship between regulators and the regulated that too often leaves justice as an orphan." The Obama Justice Department hasn't tried a single Wall Street executive in a criminal court. Against a handful, it decided to let the S.E.C. bring civil charges of fraud, which are easier to prove. So if defendants' wrists are merely being slapped by the S.E.C. instead of cuffed by the Justice Department, Obama has only his appointees to blame.

SEC Enforcement Chief Whines that Trying Cases Takes a Lot of Effort - The official position of Robert Khuzami, the Chief of Enforcement of the SEC, is laid out in a brief asking Judge Rakoff to stay his stinging rejection of the weakling settlement with Citigroup last week pending appeal. The public will suffer because the SEC will have to devote its meager resources to trying a case, so they can’t do other great stuff, like investigate insider trading (57 cases this year, big deal) and ignore dozens of other cookie cutter cases just like the ones they settle for beans. Khuzami made exactly the same argument in a speech to the Consumer Federation of America, where he claimed to be doing his very best and everyone should just get off his back.  The appeal is on shaky ground. I expect Judge Rakoff will inform the SEC of the case of Digital Equipment Corp. V. Desktop Direct, Inc., 511 U.S. 863 (1993), where a unanimous Supreme Court held that an order refusing to give effect to a settlement agreement wasn’t appealable. Perhaps the SEC will devote some of its precious resources to showing why that isn’t the governing rule. The SEC says that the stay should be granted if there is a likelihood of success on the merits, irreparable injury to someone, and whether a stay will harm the non-appellant or the public. Success on the merits is likely, says the SEC, because no court has ever required proof to sustain a consent order submitted by a US governmental agency. Apparently the SEC is so wonderful that no one has ever questioned it before in a court.

Are Obama's Financial Regulators Weak Links? - I think we're safe in calling it, for posterity, President Obama's "Day of Reckoning" speech (it's not FDR's "Rendezvous With Destiny," but it's not bad). In his address to a joint session of Congress this week, Obama said America was paying for the mistakes of the past, when difficult decisions about our economy were put off and "regulations were gutted for the sake of a quick profit." Now, he said, our day of reckoning has arrived. What the president didn't say was that the people he has placed in charge of the reckoning are sometimes the ones who did the gutting. Or at the very least, they're the ones who obstructed the reckoning for years. This is particularly true of the two people Obama has named to be the nation's top financial regulators: Mary Schapiro, chairman of the Securities and Exchange Commission, and Gary Gensler, whose hearing to be confirmed as head of the Commodity Futures Trading Commission was held on Wednesday. Schapiro failed to assert control over derivatives trading as the head of the CFTC in the mid-'90s, a time when it was already beset with fraud and manipulation. When a successor, Brooksley Born, came in, she called the unregulated derivatives market "the hippopotamus under the rug." As CFTC chair, Born tried to rein things in but was rebuffed by the Treasury Department, of which Gensler was a part.

Occupy Wall Street: “We Own Wall Street,” a new movement to stop corporate America’s misbehavior. - Eliot Spitzer - As the year ends, American politics remains mired in the agenda of the right. The House is, at least momentarily, refusing to extend the payroll tax cut and unemployment benefits—two policies genuinely beneficial to the middle class. And the presidential campaign heading into the Iowa primaries is dominated by the libertarianism of Ron Paul and the astonishing, appalling ideas—eliminate child labor laws, for instance—of Newt Gingrich. Yes, Occupy Wall Street changed the debate for a brief spell, and, yes, President Obama harkened back to the glory days of progressivism with his Kansas speech. But in general American politics has lost sight of the most important crisis of our generation: the shrinking middle class. So let me offer some advice to Democrats and progressives seeking to capture the attention of the American people. It has long been my belief that ownership trumps regulation.  What I mean by that is while laws and regulations can create boundaries to behavior, the reality, as we have seen after passing much legislation—Sarbanes-Oxley, Dodd-Frank—is that even good laws leave room for bad decision making that results in cataclysm. Even though prosecutors should have charged many more bad actors on Wall Street, much of what led to the crisis was not blatant illegality: It was horrific judgment exercised by senior executives and regulators.

Revolution through Banking? - It’s no surprise then that the banks have been an important focus of discussion in the Occupy Wall Street movement. And a new approach to banking may become one of the important ways that Occupy moves forward and starts producing material change. One evening in Zuccotti Park, I somewhat rashly, and without much forethought, stood up and announced that I wanted to set up a working group to explore alternative systems of banking. I did not have a clear plan but felt that we had to get to the heart of the problem. If we could change banking and make it embody the values of Occupy—equality, transparency, democracy—we might not only change the financial industry for the better, but also change the very nature of the economy—and thus society itself.  Other members of the group share this ambition. Those who have joined the group represent an extraordinary and eclectic mix. There are army vets and unemployed students, but also a large number of financial experts: former derivative traders, SEC regulators, bankers, financial analysts and bloggers and even a professor of financial law. We have no shortage of expertise, and no shortage of determination either.  Over the last several weeks, we have been examining what legislative changes are needed to reform the banking sector: some day soon there may be Occupy-originated proposals and draft legislation, for instance to amend the so-called “Volcker Rule”. One group has split off to explore and design the creation of an ideal bank that would put into practice the values of Occupy. What would this look like?

A Sign Occupy Wall Street Is Having Political Impact - Taibbi - For those saying that Occupy Wall Street hasn't had a concrete effect, take a look at this. It's not much, but it's a little something. The leaders of the House Financial Services Committee announced yesterday that they will be holding hearings on the SEC's practice of concluding settlements with Wall Street defendants without forcing the accused to admit to wrongdoing.This whole thing seems to be the creature of ranking Republican Spencer Bachus. From his site:"The SEC’s practice of using 'no-contest settlements' has raised concerns about accountability and transparency, and I’m pleased the Committee will examine these concerns in a bipartisan manner," said Chairman Bachus.If they actually do something about this, then it'll be time to give them a pat on the back. But in the meantime, we can expect to see a lot of things like this in an election year marked by an absence of a real galvanizing message coming from either party. With OWS and populist anger generally filling that messaging void, there are going to be a lot of politicians who will look to capitalize by doing things like, for instance, beating up on the SEC in a few days of well-publicized but ineffectual hearings.

Occupy Next Year - Jodi Dean - Last weekend I went down to New York. I had planned to participate in taking Duarte Square. The action ended before we arrived. I did get to attend an interesting conference put together by n+1. There were panels on finance, direct action, foreclosures, and debt. Panelists included Doug Henwood and David Graeber. I would estimate that a couple of hundred people were there (but I am not so great at estimating).  McKenzie Wark was sitting in front of me in the audience. He said two things that have stuck with me.

    • The first: you can tell the US is a third world country because the activist groups are basically NGOs.
    • The second: the issues of the movement are easy--jobs, austerity, debt, and a broken political system.

The rest of this post connects loosely to these two ideas. The first one is depressing not just because it brings home the condition of the country (New York City is more unequal than Brazil). It's depressing because the NGO activist model, for all its local achievements, has not stopped the ravaging of the so-called Third World or so-called global South. It's a political model that cooperates with capitalism. Organizations are issue-focused and donor-driven. They rely on experts and specialists. The second point: there are collective issues here and they are what hold the movement together. The issues are fairness and responsiveness. Our economy is unfair and our political system is not responding to this unfairness. Everything in the movement has to be focused here. Jobs and debt.  The challenge for the new year, it seems to me, is growth. People. We need more people. I'm not saying a majority of the country; we need more people in order to do more actions, bigger actions, more dramatic actions. We need more people in order to wage a general strike, to occupy the Capit0l, to shut down financial markets. We need more people in order to push the broken system over the brink.

NY top court allows private securities claims — New York's top court ruled Tuesday that securities fraud enforcement by the state attorney general doesn't pre-empt private common-law suits against investment companies, keeping the door open to billions of dollars in claims by those hurt in the Wall Street crash. The Court of Appeals rejected J.P. Morgan Investment Management's argument that New York's Martin Act gives the attorney general exclusive authority over fraudulent securities and investment practices. The court said Assured Guaranty (UK) Ltd. can sue J.P. Morgan. "We agree with the attorney general that the purpose of the Martin Act is not impaired by private common-law actions that have a legal basis independent of the statute because proceedings by the attorney general and private action have the same goal — combating fraud and deception in securities transactions," Judge Victoria Graffeo wrote. The sole exclusion is common-law claims based entirely on Martin Act violations, not those that simply overlap, she wrote. Assured claimed breach of fiduciary duty and gross negligence, alleging J.P. Morgan invested heavily in risky mortgage-backed securities while committing to a conservative investment policy for reinsurance company Orkney Re II PLC, whose obligations Assured guaranteed. After the market crashed, Assured has had to start covering Orkney losses.

Her Talent Is Suing Over Mortgage Bonds - Kathy Patrick has been a beauty queen, a Harvard law student and a singer with a Christian rock band. Lately she also is the secret weapon for big bond investors seeking to recover billions of dollars on faulty mortgage-backed securities. This summer, Ms. Patrick, a Houston lawyer with a 33-person firm called Gibbs & Bruns, extracted an agreement from Bank of America Corp. to pay $8.5 billion to investors who bought flawed mortgage bonds issued before the housing market collapsed. On Friday, she announced her next target: J.P. Morgan Chase & Co. Acting on behalf of 20 bondholders, many of whom also were involved in the Bank of America deal, Ms. Patrick last week sent a letter to five big banks asking them to open investigations into $95 billion in mortgages issued by J.P. Morgan and its affiliates. The banks serve as trustees on the bond deals. Ms. Patrick declined to identify her clients, but they include giant asset managers BlackRock Inc. and Pacific Investment Management Co., or Pimco, according to a person familiar with the matter.

Taxpayers Paying to Defend ex-Fannie, Freddie Executives from SEC - Last Friday, the SEC announced it was suing six top executives at Fannie Mae and Freddie Mac for misleading investors. Though the SEC can only sue on civil fraud charges, the announcement was greeted with fanfare, since it does relate directly to the housing bubble. I noticed a tidbit in the FT that I think is more significant than commonly understood: “Fannie and Freddie are paying the legal fees of the former executives, officials said.”  To be clear, it’s not Fannie and Freddie putting out these fees, it’s the taxpayer that owns and continually pumps capital into these companies. The Federal Housing Finance Agency, led by acting Director Ed Demarco, made the choice to pay the legal fees for these executives facing the SEC. In effect, one government agency is putting forward resources to sue six individuals defended by the resources of another government agency. And how much will this cost? Before this SEC suit, executives at Fannie and Freddie had other lawsuits against them. When I worked for Rep. Grayson in 2009, he asked, and found out that the taxpayer had already shelled out millions. Rep. Randy Neugebauer updated the costs in 2011, and found that it had cost something on the order of $100 million for pre and post bailout costs reimbursed to executives at Freddie and Fannie.

FBI Reportedly Investigating Fannie Mae, Freddie Mac For Role In Subprime Crisis - It's been a bad month for Fannie Mae and Freddie Mac. The Securities and Exchange Commission announced last week that it was suing half a dozen former executives from the mortgage giants, including the ex-CEOs of both companies. Now, the Federal Bureau of Investigation is reportedly asking questions about Fannie and Freddie's behavior in the months preceding the financial crisis, according to The Daily. At issue is whether Fannie and Freddie -- two of the largest mortgage companies in the country, and the recipients of a major government bailout in September 2008 -- misled the public and investors about the relative risk of their loans in the lead up to the financial crisis, the Daily reports. The matter has serious implications, since many allege that mortgage lenders' enthusiasm for making loans to homeowners with shoddy credit, and banks' penchant for using those loans as financial instruments, are among the principal reasons for the housing crash and financial crisis. The SEC's lawsuit probes much the same question, hitting six former executives at the two companies with charges of security fraud, and accusing them of continuing to hold onto questionable loans even after the magnitude of the risk became clear. However, it's unclear whether the SEC's pursuit of Fannie and Freddie alumni will assuage taxpayer ire or merely inflame it further, since, as CNBC recently pointed out, it's taxpayers who may end up paying the legal fees for the six defendants named in the suit, as Fannie and Freddie are now owned by the government.

Kamala Harris, California Attorney General, Sues Fannie & Freddie - California's attorney general filed lawsuits against mortgage giants Fannie Mae and Freddie Mac on Tuesday, demanding that the companies that own some 60 percent of the state's mortgages respond to questions in a state investigation. Attorney General Kamala Harris, whose office filed the lawsuits in San Francisco Superior Court, is investigating Freddie Mac's and Fannie Mae's involvement in 12,000 foreclosed properties in California where they served as landlords. She also wants to find out what role the companies played in selling or marketing mortgage-backed securities. The essentially identical lawsuits ask the mortgage firms to respond to 51 investigative subpoenas that call on Fannie Mae and Freddie Mac to identify all the California homes on which they foreclosed. They also want the mortgage firms to reveal whether they have information on the decreased value of those homes due to drug dealing or prostitution, as well as explosives and weapons found on those vacant properties. "Foreclosures not only affect the families who lose their homes, but also the safety, health and welfare of the entire community," the lawsuit said. Harris also called on Fannie Mae and Freddie Mac to disclose whether they have complied with civil rights laws protecting minorities and members of the Armed Forces against unlawful convictions and foreclosures. The suits also seek to determine whether the companies are in compliance with California's securities and tax laws.

GSEs Held $2 Trillion in Subprime Loans at Height of Financial Crisis - At the height of the financial crisis in 2008, Fannie Mae and Freddie Mac held $2 trillion in high-risk subprime loans, amounting to 42 percent of their single-family portfolios, according to Edward Pinto of the American Enterprise Institute. Pinto, who served as chief credit officer for Fannie Mae until the late 1980s, arrived at this number by relying on data from the Securities and Exchange Commission (SEC), which filed a lawsuit against six former GSE executives for securities fraud. According to the SEC, the GSEs released several statements undervaluing the amount of subprime loans in their portfolios. In a 2010 report, Pinto attributed the industry’s increase in subprime lending to government policies he said “forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing.” “These policies were legislated by Congress, promoted by HUD and other regulators responsible for their enforcement, and broadly adopted by Fannie Mae and Freddie Mac (the GSEs) and the much of the rest mortgage finance industry by the early 2000s,” Pinto wrote

An Inconvenient Truth - Over at the conservative American Enterprise Institute, two resident scholars, Peter Wallison and Edward Pinto, have concocted what has since become a Republican meme: namely, that Fannie Mae and Freddie Mac were ground zero for the entire crisis, leading the private sector off the cliff with their affordable housing mandates and massive subprime holdings.  The truth is the opposite: Fannie and Freddie got into subprime mortgages, with great trepidation, only in 2005 and 2006, and only because they were losing so much market share to Wall Street. Among other things, the Wallison-Pinto case relies on inflated data — Pinto classifies just about anything that is not a 30-year-fixed mortgage as “subprime.” The reality is that Fannie and Freddie followed the private sector off the cliff instead of the other way around.

The Big Lie - So this is how the Big Lie works.  You begin with a hypothesis that has a certain surface plausibility. You find an ally whose background suggests that he’s an “expert”; out of thin air, he devises “data.” You write articles in sympathetic publications, repeating the data endlessly; in time, some of these publications make your cause their own. Like-minded congressmen pick up your mantra and invite you to testify at hearings.  Soon, the echo chamber you created drowns out dissenting views; even presidential candidates begin repeating the Big Lie. Thus has Peter Wallison1, a resident scholar at the American Enterprise Institute2, and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae3 and Freddie Mac4 caused the financial crisis. His partner in crime is another A.E.I. scholar, Edward Pinto5, who a very long time ago was Fannie’s chief credit officer. Pinto claims that as of June 2008, 27 million “risky” mortgages had been issued — “and a lion’s share was on Fannie and Freddie’s books,” as Wallison wrote recently. Never mind that his definition of “risky” is so all-encompassing that it includes mortgages with extremely low default rates as well as those with default rates nearing 30 percent. These latter mortgages were the ones created by the unholy alliance between subprime lenders and Wall Street. Pinto’s numbers are the Big Lie’s primary data point.

Bank loans to small business fall to 12-year low - New federal data show that the number of small bank loans to business has fallen to the lowest point in more than a decade, cutting the flow of money to a sector that's usually a job-creation powerhouse. "It's usually the smaller business that is more able to bounce back and take advantage of different opportunities faster than a middle-market company," said Linda O'Connell, manager of small business research at Barlow Research Associates, a Minneapolis market research firm that focuses on the financial industries. "We haven't seen that." An analysis of recently released Federal Deposit Insurance Corp. data by the Investigative Reporting Workshop shows that overall commercial and industrial lending by banks has increased for five straight quarters, but small loans to business of $1 million or less have been shrinking consistently since June 2008. As of Sept. 30, total outstanding loan volume was down 14.7 percent from its peak. The reduction of bank credit has had an even bigger impact on small business than it would on large business, which can borrow money through corporate bonds and "commercial paper." In contrast, small businesses rely almost exclusively on credit provided from banks.

Unofficial Problem Bank list declines to 973 institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Dec 23, 2011. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  We were only half right on anticipations this week as we accurately anticipated no closings but inaccurately anticipated the FDIC would release its formal enforcement activities for November 2011. Thus, it was a quiet week with only one removal leaving the Unofficial Problem Bank List at 973 institutions with assets of $397.6 billion. A year ago, the list held 919 institutions with assets of $407.9 billion.

CMBS delinquencies hit 22-year high - Collateral backing industrial commercial mortgage-backed securities recently hit a delinquency rate of 12.05%, a 22-year high, Standard & Poor's Ratings Services said Monday. The high delinquency rate in the segment generally tracks alongside the nation's gross domestic product activity, which shrank for four quarters in a row during 2008 and 2009 before beginning a slow climb back up. S&P noted that "the industrial segment is the only major CMBS property type for which delinquencies are currently at historical highs." S&P said based on studies of servicer-provided net operating income, more than 47% of CMBS industrial collateral has undergone some type of decline since its original issuance. About $2.4 billion industrial loans are scheduled to mature next year, a factor that is expected to prevent improvement in the number of industrial delinquencies, S&P said.

Bubble Trouble in the U.S. Heartland? - The “smart money” has been buying up farmland hand over fist for the past few years and you can see how they helped drive up land prices in the U.S. heartland. Some think this is the place to be if the shit really hits the fan. Not gold, but productive assets that you can eat. Remember the Jan. ’09 NY Magazine piece of the U.S. hedge fund manager entertaining buying a zodiac and “putting it in storage unit on the West Side, so he could get off the island quickly” in the event of a total financial collapse and social breakdown? Same concept. On a similar topic, see here for an interesting Telegraph article on how the British military is concerned about the potential collapse of the Euro. The Telegraph writes, The military planning work has come to light after The Daily Telegraph disclosed last month that British embassies in the eurozone have been told to prepare emergency plans for the demise of the euro and the possible civil disorder that could follow.

FHFA Inspector General End Runs DoJ, Joins Forces With New York Attorney General Schneiderman - Yves Smith - The development reported by the Financial Times' Shahien Nasiripour, that the inspector general for the FHFA, the supervisor of Fannie and Freddie, and the Federal Home Loan bank, has decided to share information with New York State attorney general Eric Schneiderman, is far more significant than it appears on the surface. It’s a well deserved slap in the face of the Department of Justice. I’m not certain of the precise scope of powers of the FHFA inspector general. But typically, federal inspector generals have limited scope of action. They can only subpoena documents and cannot subpoena witnesses. And, of course, they are not prosecutors and cannot launch cases. The theory of IGs is that if they uncover something unsavory, they’ll hand it off to the Department of Justice. But as a former IG has pointed out, the DoJ does not take case leads from the IGs unless they are fully fleshed out, and that is well nigh impossible to do in the absence of speaking to witnesses.The Department of Justice has AWOL on the mortgage and banking beat, no doubt to avoid ruffling powerful possible Obama donors. Inspectors general are in theory independent, and on top of that, the FHFA is an independent agency and is not running the Administration playbook (I’ve been told by people involved in bank regulation that Geithner has tried pressuring FHFA acting chief DeMarco to no avail).  So what does the FHFA inspector general do, certain that Eric Holder will ignore any misdeeds he finds? Turn to another prosecutor who can bring cases that can bring cases that are national in scope.

Tom Miller Can’t Even Lie Well Anymore: Not Only No Deal By Christmas, As Promised, But Banks Upping Demands Even As Attorneys General Leave Table - We’ve commented previously on Tom Miller as the contemporary exemplar of what in the 1960s was called a credibility gap. Readers no doubt know that he is the lead negotiator on behalf of the state attorneys general in what was formerly called the 50 state attorney general [mortgage] settlement. (Notice separately how the state AGs are providing cover for several Federal banking regulators, HUD and the Department of Justice, which are also parties to this deal).  Miller started by promising criminal prosecutions, then reneged. He has refused to do investigations, then had the temerity to try to claim they took place). He said there would not be a big waiver on mortgage liability, when as we discussed, that was the only thing Miller & Co. could offer that would get a deal to the numbers he had unwisely committed himself to (north of $20 billion). And several state attorneys general have walked from the deal precisely because they object to the plan in motion: a big release for an impressive-sounding number, when they have an inadequate idea of how much questionable activity is being forgiven.  Earlier this month, Miller said a deal would be done by Christmas. Today we learn (quelle surprise!) that there will be no pact in Santa’s bag. But even more telling, as far as Miller’s veracity is concerned, is another revelation in the report from National Mortgage News. It keeps up the party line that California attorney general Kamala Harris might rejoin the talks. While she is perceived to be more opportunistic than most state prosecutors, she has been moving further and further away from the settlements. She has teamed up with the most aggressive attorney general, Catherine Masto of Nevada, to investigate mortgage abuses.

BOMBSHELL Bankster Bonanza- Florida Supreme Court Kills Foreclosure Mediation! - The banksters follow the rules they want, ignore the ones they don’t like, then just play games and make the pursuit of justice of impossible…..their latest victory>>>>>>> In Florida, after years of study and work, the Florida Supreme Court initiated a groundbreaking, fairness-provoking program that sought to level the playing field and force the banks who were bailed out by the American people to deal in good faith, but the banks of course are not in the habit of dealing in good faith with their benefactors, instead…… THE BANKSTERS JUST GOT FLORIDA’S MANDATORY FORECLOSURE MEDIATION CANCELLED! True, mediation was a total failure, but this was largely the plan of the banksters from the beginning…..withhold information, flaunt and violate the rules, thumb your nose at court orders and authority and generally continue to abuse the taxpayers that bailed you out and saved you.

FHFA’s DeMarco Considering Backdoor Bankruptcy Principal Modification Program for Freddie and Freddie - Yves Smith - Quite a few housing market experts have argued that principal modifications to viable borrowers are the best way to resolve the housing market malaise. In the stone ages when banks kept the mortgages they originated, mortgage modifications, including principal mods, were standard practice when a borrower got in financial difficulty but was still salvageable. And because these restructurings were done behind closed doors, no one but the banker and his grateful customer were the wiser. But now that servicer bad incentives have meant they don’t do mods unless cajoled or bribed by the government (and not much even then), the topic has entered the public debate. It had appeared that any principal mod program was going to come over the dead bodies of the banks, who have been feigned compliance with various Federal programs but either dragged their feet and/or gamed the schemes. So it was surprising to read that the acting head of the FHAF, Edward DeMarco, is considering what amounts to a principal mod program implemented through bankruptcy courts. As Shahien Nasiripour reports in the Financial Times:The Federal Housing Finance Agency is “actively considering” a plan that would call for Fannie and Freddie to allow homeowners in Chapter 13 bankruptcy proceedings who owe more on their housing debt than their homes are worth to pay zero per cent interest for five years, subject to approval by bankruptcy judges, according to a letter to Congress dated Monday.

Details of Mortgage Servicing Settlement Between Banks and AGs Begin to Emerge - The never-ending negotiations between the 50 state attorneys general (minus a few big ones) and five major banks over penalties and standards for past, present and future mortgage servicing are finally ending, and some details are beginning to emerge from sources familiar with the deal. The big number is the $25 billion that the banks will commit to three categories of the settlement: $5 billion in cash payments, mostly to the states, $3 billion in refinancing for underwater mortgages, and $17 billion in principal reduction. Here’s the breakdown: Of the $5 billion, $1.5 billion will go to people who have been foreclosed on and were abused in some way during the process. The claims are nearly instantaneous–”we don’t read anything, it’s check the box,” says one state AG negotiator. But the payments are also small: $1,500 to $2,000. Now, the vast majority of people who lost their homes over the last several years probably would not have been able to make their payments even if the banks had been behaving well. For them a no-questions-asked $2,000 check from the bank for the poor treatment they received in the process may be fair. On the other hand, those who were unfairly evicted may be insulted by the small amount.

More MSM Criticism of Obama “Nothing Illegal Here, Move Along” Stance on Foreclosure Fraud - - Yves Smith - While quite a few bloggers, prosecutors, economists, and other experts have taken the Administration to task on mortgage-related abuses, the mainstream media for the most part has not seriously challenged the mind-numbing Obama claim that the banksters did nothing illegal. Reuters refreshingly opposed that bullshit assertion frontally yesterday. In a piece pointedly titled, “The Watchdogs That Didn’t Bark,” reporter Scot Paltrow shows that the mortgage arena is a target-rich environment: The federal government, as has been widely noted, has pressed few criminal cases against major lenders or senior executives for the events that led to the meltdown of 2007… The government also hasn’t brought any prosecutions for dubious foreclosure practices deployed since 2007 by big banks and other mortgage-servicing companies. The article is very much worth reading in full, and sets forth specific examples of abuses, such as:

    • Document fabrications and forgeries
    • Illegal foreclosures on active duty servicemen, which are criminal misdemeanors under the Servicemembers’ Civil Relief Act
    • Exaggerating the amount owed by charging for services never performed and overstating how much the borrower was in arrears
    • False claims in court that the bank had offered borrowers mortgage modifications
    • Persistent and “outrageous” misstatement of material facts by foreclosure mills

Michael Olenick: The Administration Likes Foxes in Charge of Henhouses – Proof that OCC Foreclosure Reviews Are a Sham - “There Goes the Neighborhood,” which ran on 60 Minutes last Sunday, is a must-see piece. Scott Pelley walks through a pillaged house in Cleveland, slated for demolition in a county neighborhood stabilization program. This abandoned house is owned by Structured Asset Investment Trust 2003-BC11. An investor reports lists the property as “in foreclosure” despite no court filing. Ohio is a judicial foreclosure state, so a foreclosure filing requires a lawsuit, but there isn’t one.According to the prospectus, Trust 2003-BC11 was underwritten by Lehman Brothers. Aurora Loan Services is the Master Servicer, though the entire trust was passed to sub-servicers. Specifically Chase, Option One, Ocwen, and Wells Fargo serviced 30.46%, 29.47%, 26.84%, and 12.19% of the loans.On September 9, 2011, Allonhill signed an engagement letter — a definitive agreement — with the Office of the Comptroller of the Currency (OCC), as part of the consent order wherein servicers agreed to submit foreclosure fraud for review by “independent” third-party companies. The engagement letter notes that Allon founded Murrayhill, “which pioneered the concept of independent third-party oversight of loans and servicers.” But there is no mention that Murrayhill was tasked with promulgating and monitoring Aurora’s default policies and procedures.That is, OCC chief John Walsh signed off on hiring Allon to audit her prior work for fraud. Let’s repeat that; the OCC — an arm of President Obama’s Treasury Department — signed off, allowing a company founded and managed by the woman who created Aurora’s foreclosure practices to audit her own firm’s work, and did so pursuant to a consent order and under the guise of consumer protection. Allonhill, the firm that promulgated and enforced foreclosure policies, is based less than a mile away from the address listed for Murrayhill, the firm auditing for foreclosure fraud on behalf of borrowers.

Occupy Atlanta Helps Save Iraq War Veteran’s Home From Foreclosure  -- In a tangible victory by the Occupy movement, Occupy Atlanta has successfully helped save an Iraq War veteran from foreclosure.  Activists began occupying Brigitte Walker's home on Dec. 6. By the end of that first week, JPMorgan Chase, which owns her mortgage, began discussing with the activists and Walker the possibility of a loan modification. Chase's modification offer became official Monday morning. The offer will result, Walker tells The Huffington Post, in hundreds per month in savings.  Before Occupy Atlanta set up its tents on her lawn, Chase had set an eviction date for Jan. 3. Now, Walker, who lives with her girlfriend and her two children, will get to stay in her Riverdale, Ga. home. "I strongly believe Occupy Atlanta accelerated the process and helped save my home," Walker says. "If it had not been for them standing up, I probably wouldn't be having this happy ending." Chase did not return a request seeking comment.

What’s Driving High Foreclosure Rates? - Chicago Fed - High and rising foreclosures are a big concern in the Seventh District (IA, IL, IN, MI, and WI) and in the country and will continue to be for some time. Our last guest blog on the Midwest economy digs into what reported foreclosure rates really identify. "Foreclosure starts" measure the pace at which homes are entering foreclosure. This rate reflects any deterioration in the ability of homeowners to meet their mortgage obligations for reasons such as job loss, inability to borrow against home equity due to falling home prices, or rising loan payments. Financial troubles may also be caused by life events, such as sudden medical expenses or divorce. Turning to a stock measure, the "inventory rate of homes in foreclosure" counts homes currently in the process of foreclosure. A high rate can reflect a high rate of past foreclosure starts on homes that have not yet been claimed and sold. However, it can also reflect high transition rates of foreclosure. That is, once a home enters foreclosure, it may linger there because process times are extraordinarily long.

The Value(s) of Foreclosure Law Reform? - As Alan White reported recently, the Uniform Law Commission in the U.S. has named a committee to consider the need for and feasibility of proposing a uniform foreclosure act and to report back to the ULC by early 2012.  A letter from the ULC president includes a list of questions that the committee is charged to consider.   But what principles will guide their analysis of these questions? Especially before the foreclosure crisis, the traditional law review scholarship on residential foreclosure generally articulated the values at stake in foreclosure reform as the right to an expeditious collection process for the mortgagee, and the preservation of the economic value of home equity for the borrower through fair market sale prices.     Yet, at this point, it seems impossible to treat foreclosure law as entirely distinct from broader questions of housing policy and community development.   Incorporating these broader questions means asking about the shelter needs of foreclosure defendants, the disruption in education for kids in enrolled in public schools, and externalities such as neighbors' property values, declines in local tax revenues, and other community effects.  These kinds of values or questions do not automatically justify continued owner-occupation, as I wrote for a symposium on foreclosure.  But their consideration can shape the details of how and when owner-occupation is terminated.

BofA Said Close to Settling Fair-Lending Probe - Bank of America Corp. (BAC) is close to settling a U.S. Justice Department probe into whether its Countrywide Financial Corp. unit violated fair-lending practices, said two people with knowledge of the discussions. A deal may be announced as early as this week and will include money to compensate Countrywide customers, said the people, who declined to be identified because the talks were private. Charlotte, North Carolina-based Bank of America acquired subprime lender Countrywide in 2008, and with it billions of dollars in mortgage liabilities. Bank of America, the second-largest U.S. lender by deposits, would be the biggest financial firm to settle a case with the Justice Department’s new fair-lending unit. The DOJ has extracted more than $30 million in compensation for loan discrimination cases, including deals with American International Group Inc. and Citizens Republic Bancorp Inc.

DoJ’s Christmas Present to Bank of America: $335 Million Settlement for Discriminatory Lending Charges at Countrywide - Yves Smith - The New York Times reports faithfully that the Department of Justice has entered into the biggest fair lending settlement on record with Bank of America on charges that Countrywide had charged more 200,000 Hispanic and black borrowers higher rates and fees than white borrowers with similar credit records. It also engaged in discrimination by marital status.  Impressive, no? If you do the math, $335 million divided by 200,000 is $1675 per borrower, and the settlement agreement indicates that the amount borrowers will receive will average $1600. While obeying the usual “no one admits to anything” forms, the settlement has language that indicates that borrowers were overcharged in the range of several hundred dollars to several thousand dollars. So at a superficial level, one might conclude the settlement amount is roughly in line with the damages suffered by borrowers.  But is it? First, we don’t know the distribution of the alleged damages. And there is a net present value issue. Countrywide has thus has the use of its presumably ill gotten money all these years. And if this settlement is philosophically a disgorgement, that suggests that a fine is also in order. And there are other cute features, such as the settlement is to be administered by someone hired and paid for by Bank of America.  More important, given the number of people involved, one has to think that there are some cases where the difference between the cost of the loan these borrowers got and the cheaper ones they qualified for could have made the difference between a borrower making it versus going into delinquency. So for any cases where the overcharges tipped a stressed borrower into a foreclosure, the settlement is clearly inadequate.

Nearly Half of all November Sales Were Distressed - Despite solid demand for home purchases overall, a glut of distressed properties is continuing to put downward pressure on home prices, according to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey. Distressed properties accounted for a hefty 46.1 percent of home purchase transactions in November as reported in the HousingPulse Distressed Property Index (DPI), using a three-month rolling average. Significantly, November marked the 23rd month in a row that the DPI has been above 40 percent. At the same time, however, homebuyer demand for housing appears surprisingly strong, especially for lower-priced foreclosed properties or real estate owned (REO). Time on market for move-in ready REO was just 10.1 weeks in November, the lowest in 15 months, according to HousingPulse. Time on market for damaged REO was even lower at 9.0 weeks in November, also the lowest in 15 months. Short sales were the largest segment of the distressed property market during the month of November, accounting for 17.6% of total home purchase transactions tracked in the HousingPulse survey. Move-in ready REO was the next largest group of distressed properties with a 15.2% share, followed by damaged REO with a 13.3% share of total transactions. Non-distressed home purchases accounted for the remaining 53.9% of home purchases in November.

CoreLogic: Existing Home Shadow Inventory remains at 1.6 million units -From CoreLogic: CoreLogic® Reports Shadow Inventory as of October 2011 Still at January 2009 Levels CoreLogic ... reported today that the current residential shadow inventory as of October 2011 remained at 1.6 million units, representing a supply of 5 months. This was down from October 2010, when shadow inventory stood at 1.9 million units, or 7-months’ supply, but approximately the same level as reported in July 2011. Currently, the flow of new seriously delinquent loans into the shadow inventory has been offset by the roughly equal flow of distressed (short and real estate owned) sales. This graph from CoreLogic shows the breakdown of "shadow inventory" by category. For this report, CoreLogic estimates the number of 90+ day delinquencies, foreclosures and REOs not currently listed for sale. Obviously if a house is listed for sale, it is already included in the "visible supply" and cannot be counted as shadow inventory. So the key number in this report is that as of October, there were 1.6 million homes seriously delinquent, in the foreclosure process or REO that are not currently listed for sale.

Yearly Home Values Decline Nearly $700B, But Rate of Decline Slows - As 2011 comes to a close, Zillow anticipates home value declines for the year will total more than $681 billion. The rate of depreciation, however, is slowing. The $681 billion decline this year is 35 percent less than last year’s $1.1 trillion drop in value. Additionally, much of this year’s decline occurred during the first half of the year. Values declined $454 billion in the first six months of 2011, and by the end of the second half of the year, values are expected to wan another $227 billion. “While homeowners suffered through another year of steep losses, the good news is that homes are losing value at a substantially slower pace as the market works its way towards the bottom,” said Zillow Chief Economist Stan Humphries. “Compared to last year when we saw sharp declines following the expiration of the homebuyer tax credits, this year we saw some organic improvement in home values, in terms of a slowed depreciation rate which resulted in a smaller total value loss for the year,” Humphries said. Nine of the 128 markets Zillow tracked experienced increasing home values over the year. The largest gain was seen in the New Orleans area, where home values rose $3.5 billion. The Pittsburgh metropolitan statistical area (MSA) followed with a $2.7 billion upsurge.

More House Price Indexes show price declines in October - The Case-Shiller House Price index for October will be released Tuesday, Dec 27th.  Here are a few other recently released indexes:

  • • Yesterday from FNC: Home Prices Continue to Weaken: Down 0.6% in October - Based on the latest data on non-distressed home sales (existing and new homes) through October, FNC’s national RPI shows that single-family home prices fell in October to a seasonally unadjusted rate of 0.6%. The September index value is revised downward from -0.4% to -0.9%.The FNC index tables for three composite indexes and 30 cities are here.
  • • From Radar Logic today Home Prices Decline Year-Over-Year in October for Fifth Year in a Row - Home prices fell 5.4 percent year over year through October 20, making 2011 the fifth year in a row in which the 25-metropolitan-statistical-area (MSA) RPX Composite price has declined year over year in October. The Composite price declined 2.0 percent on a month-over-month basis, the largest such decline in three years.
  • • CoreLogic reported earlier this month for October: CoreLogic: House Price Index declined 1.3% in October basis  October Home Price Index (HPI®) which shows that home prices in the U.S. decreased 1.3 percent on a month-over-month basis, the third consecutive monthly decline. According to the CoreLogic HPI, national home prices, including distressed sales, also declined by 3.9 percent on a year-over-year basis in October 2011.
  • • From FHFA today: FHFA House Price Index Falls 0.2 Percent in October U.S. house prices fell 0.2 percent on a seasonally adjusted basis from September to October, according to the Federal Housing Finance Agency’s monthly House Price Index.... For the 12 months ending in October, U.S. prices fell 2.8 percent.
  • • From Zillow: Zillow Forecast: October Case-Shiller Composite-20 Expected to Show 3.5% Decline from One Year Ago  The Case-Shiller Composite Home Price Indices for October will be released on Tuesday, the 27th of December. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted, NSA) will decline by 3.5 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will show a year-over-year decline of 3.2 percent.

The Economic Consequences of De-Occupying Your House - My co-blogger expressed sympathy with Megan McArdle’s objections to walking away from your home. Surowiecki says that strategic defaults "would force lenders to be more responsible in the future" but he doesn’t make it clear that the corollary is "people would find it harder to get a mortgage (and the value of homes would drop)". The "people don’t default unless they have to" norm allows us all to get much cheaper loans, while letting off those who, well, really have to.  Destroying that norm would come at considerable cost: 25-40% minimum downpayments, higher foreclosure risk, higher interest rates, higher fees. I don’t think that at this moment a massive wave of strategic defaults would be a net positive for economic growth. On the other hand I suspect that altering norms so that strategic default was the baseline would make for a more prosperous society. First, it takes a heap of Harbinger Triangles to fill an Okun’s gap. That is, to say the economy can afford an enormous number of market distortions if those distortions in turn avoid recession. Getting stuck in a balance sheet recession destroys enormous amounts of productive capacity and ruins the lives of millions of people. Its fairly high on the “things that are bad list”

Q3 2011: Mortgage Equity Withdrawal strongly negative - The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity (hence the name "MEW", but there is little MEW right now!), normal principal payments and debt cancellation. For Q3 2011, the Net Equity Extraction was minus $75 billion, or a negative 2.6% of Disposable Personal Income (DPI). This is not seasonally adjusted. This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.  The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined sharply in Q3. Mortgage debt has declined by $730 billion over the last fourteen quarters. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance. Note: most homeowners pay down their principal a little each month unless they have an IO or Neg AM loan, so with no new borrowing, equity extraction would always be slightly negative.

Mortgage Rates Fall to Fresh Historic Record Lows - Mortgage rates fell again this week to fresh record lows, according to data released today by Freddie Mac.  The 30-year rate fell to 3.91% (see chart above), the 15-year rate dropped to 3.21% and the one-year ARM is down to 2.77%, and those are all the lowest rates in history.  How low can they go?

30-Year Mortgage Rates Just Hit A New Record Low - The national average 30-year fixed mortgage rate hit 3.91% last week, down from 3.94% a week ago.  This is according to Freddie Mace's Primary Mortgage Market Survey. Freddie Mac's Chief Economist Frank Nothaft thinks this is more good news for the housing market: "Rates on 30-year fixed mortgages have been at or below 4 percent for the last eight weeks and now are almost 0.9 percentage points below where they were at the beginning of the year, which means that today's homebuyers are paying over $1,200 less per year on a $200,000 loan. This greater affordability helped push existing home sales higher for the second consecutive month in November to an annualized pace of 4.42 million, the most since January. In addition, new construction of one-family homes also showed a back-to-back monthly gain in November to the largest increase since June. Moreover, homebuilder confidence in December rose to its highest reading since May 2010 according to the NAHB/Wells Fargo Housing Market Index." Lower borrowing rates were exactly what the Fed was hoping for when it embarked on Operation Twist.  In fact, Fed Chairman Ben Bernanke may have also capitalized on the lowered rates. For some context:

MBA: Mortgage Purchase Application Index decreases, Mortgage rates at low for year - From the MBA: Mortgage Rates Drop to Another 2011 Low in Latest MBA Weekly Survey The Refinance Index decreased 1.6 percent from the previous week. The seasonally adjusted Purchase Index decreased 4.9 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 4.08 percent, the lowest rate this year, from 4.12 percent ...  The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) decreased to 4.44 percent, the lowest rate this year, from 4.47 percent ... The following graph shows the MBA Purchase Index and four week moving average since 1990.  The purchase index decreased last week, and the 4-week average decreased slightly. This index has mostly been sideways for the last 2 years - and at about the same level as in 1997.

Existing-Home Sales Continue to Climb in November - Existing-home sales rose again in November and remain above a year ago, according to the National Association of Realtors®. Also released today were periodic benchmark revisions with downward adjustments to sales and inventory data since 2007, led by a decline in for-sale-by-owners. Although rebenchmarking resulted in lower adjustments to several years of home sales data, the month-to-month characterization of market conditions did not change. There are no changes to home prices or month’s supply.The latest monthly data shows total existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 4.0 percent to a seasonally adjusted annual rate of 4.42 million in November from 4.25 million in October, and are 12.2 percent above the 3.94 million-unit pace in November 2010.

Existing Home Sales in November: 4.42 million SAAR, 7.0 months of supply - Note: this includes the downward revisions for years 2007 through 2011. The NAR reports: Existing-Home Sales Continue to Climb in November Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 4.0 percent to a seasonally adjusted annual rate of 4.42 million in November from 4.25 million in October, and are 12.2 percent above the 3.94 million-unit pace in November 2010. Total housing inventory at the end of November fell 5.8 percent to 2.58 million existing homes available for sale, which represents a 7.0-month supply4 at the current sales pace, down from a 7.7-month supply in October....Also released today are benchmark revisions to historic existing-home sales. The 2010 benchmark shows there were 4,190,000 existing-home sales last year, a 14.6 percent revision from the previously projected 4,908,000 sales. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. The second graph shows nationwide inventory for existing homes. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change.

Realtors Lower 2007-2010 Home-Sales Estimates by 14% - U.S. home sales from 2007 through 2010 were about 14% lower than first reported, a real estate trade group said Wednesday, a sharp revision showing the housing bust was far worse than initially thought. The National Association of Realtors revised downward its sales figures since 2007, using annual Census survey data to recalculate how many homes were sold. Sales for all of 2011 are on track to hit around 4.25 million, up slightly from last year’s level of 4.19 million, which was revised downward 15%, said Lawrence Yun, the Realtors’ group’s top economist. The Realtors’ new figures also show 2008 was the worst year for home sales during the housing bust, with only 4.11 million sold, down 16% from the previous estimate of 4.91 million. Home sales for the first 10 months of this year were also revised downward. October’s sales pace was lowered to a rate of about 4.25 million sales per year, from an original estimate, from an original level of 4.97 million. Yun cited several reasons for the group’s sales revisions. The group’s reports were “not matching up with other housing-related data,” he said. The Realtors group, he said, was overcompensating for sales that were not recorded through the regional and local real estate listing services from which the group gets its data.

Existing Home Sales Revisions - The NAR released the benchmark revisions today. From the NARAlso released today are benchmark revisions to historic existing-home sales. The 2010 benchmark shows there were 4,190,000 existing-home sales last year, a 14.6 percent revision from the previously projected 4,908,000 sales. For the total period of 2007 through 2010, sales and inventory were downwardly revised by 14.3 percent. Here are a couple of graphs to illustrate the revisions: The first graph shows the revised sales rate (seasonally adjusted annual rate), and the pre-revision sales rate in blue.  The second graph shows the revision to inventory. Inventory has been revised down sharply for years 2007 through 2011. As expected, with the downward revision, inventory is now at late 2005 levels. The next graph shows inventory by month since 2004. In 2004 (black line), inventory was fairly flat and declined at the end of the year. In 2005 (dark blue line), inventory kept rising all year - and that was a clear sign that the housing bubble was ending.  With the revisions, inventory in 2011 (dark red) is below the level of November 2005. The following graph shows existing home sales Not Seasonally Adjusted (NSA). Of course this doesn't include "shadow inventory". In an earlier release this morning, CoreLogic estimated the shadow inventory as 1.6 million units.

Correcting Data Error, Realtor Group Revises Existing-Home Sales Downward - The organization that once said the housing boom would never bust said on Wednesday that the market collapse was even worse than it originally reported. In a rather drastic statistical error, the National Association of Realtors said that sales of previously occupied homes from 2007 to 2010 were a little more than 14 percent lower than it previously reported. The group also said that sales of single-family houses, town houses, condos and co-ops in November rose to 4.42 million, their highest level in 10 months (after the revisions). The association noted, though, that a third of all contracts signed in the month did not lead to closed sales, a sign that buyers were still nervous and lenders were still being extremely cautious about approving loans. Lawrence Yun, chief economist of the Realtors, said the organization had been noticing that its data showed higher volumes of sales than other indicators like records of property deeds and mortgage applications. It revised its data once the 2010 Census confirmed that the group had been overcounting home sales.

Unreliable housing statistic of the day - How many existing homes (as opposed to new homes) were sold between 2007 and 2010? The job of counting such things is outsourced to the National Association of Realtors, which up until yesterday said that the number was 20,629,000. Today, however, it released revised figures, saying that the true figure is 17,680,000 — a difference of 3 million homes. At an average of say $250,000 apiece, that means the economy saw $750 billion less in economic activity, over those four years, than the NAR had given us to believe. That’s real money. Here’s the NAR’s official chart of the old and new numbers: In one sense, this shows that the housing slump was much worse than we were told. But in another sense, what we’re seeing here is fewer people selling their homes at a loss. And what that says to me is that it’s going to take a very long time yet before we get a healthy, clearing housing market. There are three factors making today’s housing market highly artificial. The first is historically unprecedented interest rates: the average 30-year fixed rate mortgage in November was taken out at just 3.99%. That creates a temporary speculative lift for the housing market, and raises serious questions about whether today’s housing prices can withstand a return to normality in the mortgage market.

Investigating the NAR's Seemingly Incredulous Statement on the Accuracy of Local Housing Data; Discussion with Calculated Risk on "Where to From Here" - A statement by Lawrence Yun, chief economist for the National Association of Realtors as listed in a report on existing home sales caught my eye today. "From a consumer's perspective, only the local market information matters and there are no changes to local multiple listing service data or local supply-and-demand balance, or to local home prices" said Yun. On the surface, the statement seems incredulous. How can the national data be completely screwed up, in need of major revisions, if the local data is accurate? I had a chat with Calculated Risk today regarding that statement by the NAR. Calculated Risk explains various ways the national data can be messed up even if the local data is accurate. It has to do with procedural errors in NAR methodology, extrapolating local data to national trends.

Impact of NAR Revisions on GDP - The NAR mentioned today: For the total period of 2007 through 2010, sales and inventory were downwardly revised by 14.3 percent. The revisions are expected to have a minor impact on future revisions to Gross Domestic Product. Several readers have asked about the impact on GDP. The answer is very little. When a previously occupied home is sold, nothing is "produced" except some commissions and fees. So the only significant contribution to GDP is the brokers' commissions. Since the BEA uses the NAR existing home sales report to estimate brokers' commissions, commissions will be revised down for 2007 through 2011. Brokers' commissions are a component of Residential Investment. The following table shows an estimate of these downward revisions. As an example, brokers' commissions in 2007 will be revised down to $76.9 billion from $86.6 billion, and Residential Investment and GDP will be revised down by the same amount (my estimate) But real GDP annualized growth will mostly be unchanged for the last several years. Since GDP growth is the change from one period to the next, the most impact will come to years with the largest changes in the NAR revisions (from 2006 to 2007). It is possible 2007 will be revised down slightly. There will be no change to real GDP growth in 2011.

Lawler: The NAR “benchmark revision story” is not over! - The National Association of Realtors estimated that US existing home sales ran at a seasonally adjusted annual rate of 4.42 million in November, a figure that reflected that NAR’s long-awaited “benchmark” downward revisions in sales for 2007 through 2010. November’s revised sales pace was up 4% on a SA basis from October’s pace, and was pretty close to my estimate incorporating revisions. The NAR also reported that its estimate of the inventory of existing homes for sale at the end of November was 2.580 million, an estimate that also reflected benchmark revisions  As I had expected, the NAR used data from the American Community Survey (and from the American Housing Survey) to “guesstimate” home sales, rather than using actual property records – in large part because the latter are either not available in many parts of the country, or the data quality are poor. The NAR did note, however, that “an increasing use of public records data may be appropriate in the future,” which is absolutely the case. The NAR released revisions to annual sales, monthly seasonally adjusted sales, and monthly unadjusted sales. However, the annual revised sales reported don’t match the sum of unadjusted monthly sales, and because of rounding the sum of SF sales and condo sales does not match total sales in every year. As a result, I am going to report the “revised” sales as the sum of unadjusted sales estimates.

New Home Sales increase in November to 315,000 SAAR - The Census Bureau reports New Home Sales in November were at a seasonally adjusted annual rate (SAAR) of 315 thousand. This was up from a revised 310 thousand in October (revised up from 307 thousand). The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.The second graph shows New Home Months of Supply. Months of supply decreased to 6.0 in November.  The all time record was 12.1 months of supply in January 2009. This is now close to normal (less than 6 months supply is normal). Starting in 1973 the Census Bureau broke inventory down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was at 59,000 units in November. The combined total of completed and under construction is at the lowest level since this series started. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In November 2011 (red column), 22 thousand new homes were sold (NSA). This was the second weakest November since this data has been tracked, and was just above the record low for November of 20 thousand set in 2010. The high for November was 86 thousand in 2005.

2011 Shaping Up As Worst Year Ever For Home Sales - Americans bought slightly more new homes in November, but 2011 will likely end up as the worst year for sales in history. The Commerce Department says new-home sales rose 1.6 percent last month to a seasonally adjusted annual rate of 315,000. That's less than half the 700,000 new homes that economists say should be sold to sustain a healthy housing market. It's also below the 323,000 homes sold last year — the worst year for sales on records dating back to 1963. New homes account for just a fraction of the housing market, but they have a big impact on the economy. Each new home built creates roughly three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders. Economists say housing is a long way from fully recovering. Builders have stopped working on many projects because it's been hard for them to get financing or to compete with cheaper re-sale homes. For many Americans, buying a home remains too big a risk more than four years after the housing bubble burst.

Home Sales: Distressing Gap - Here is the first "distressing gap" graph after the benchmark revision for existing home sales. Even with the significant downward revisions to existing home sales for the years 2007 through 2011, most of the distressing gap remains. The following graph shows existing home sales (left axis) and new home sales (right axis) through November. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.  Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders can't compete with the low prices of all the foreclosed properties. I expect this gap to eventually close once the number of distressed sales starts to decline. Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Housing Starts increase in November - From the Census Bureau: Permits, Starts and Completions Privately-owned housing starts in November were at a seasonally adjusted annual rate of 685,000. This is 9.3 percent (±13 1%)* above the revised October estimate of 627,000 and is 24.3 percent (±20.1%) above the November 2010 rate of 551,000.  Privately-owned housing units authorized by building permits in November were at a seasonally adjusted annual rate of 681,000. This is 5.7 percent (±1.6%) above the revised October rate of 644,000 and is 20.7 percent (±1.8%) above the November 2010 estimate of 564,000. Total housing starts were at 685 thousand (SAAR) in November, up 9.3% from the revised October rate of 627 thousand (SAAR). Most of the increase this year has been for multi-family starts, but single family starts are increasing a little recently too. Single-family starts increased 2.3% to 447 thousand in November. The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have been mostly moving sideways for about two years and a half years - with slight ups and downs due to the home buyer tax credit. Multi-family starts are increasing in 2011 - although from a very low level. This was well above expectations of 630 thousand starts in November. Single family starts are still mostly "moving sideways".

Multi-family Starts and Completions, Record Low Total Completions in 2011 - Since it usually takes over a year on average to complete multi-family projects - and multi-family starts were at a record low last year - builders are on track to complete a record low, or near record low, number of multi-family units this year. The following graph shows the lag between multi-family starts and completions using a 12 month rolling total.  The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010.  The rolling 12 month total for starts (blue line) has been increasing all year. It now appears multi-family starts will be around 170 thousand units in 2011, up from 104 thousand units in 2010. That is a 60%+ increase in multi-family starts - but from a very low level. Completions (red line) appear to have bottomed. This is probably because builders have rushed some projects to completion because of the strong demand for rental units. The previous record low for multi-family completions was 127.1 thousand in 1993. It will be close this year, however total completions will be at a record low - and the U.S. will add the fewest net housing units to the housing stock since the Census Bureau started tracking completions in the '60s. Below is a table of net housing units added to the housing stock since 1990. Note: Demolitions / scrappage estimated.

U.S. housing heals even as its damage widens (Reuters) - The U.S. housing market, once the epicenter of the global financial collapse that spawned today's European debt crisis, is on the verge of delivering some positive news. For the first time since 2005, U.S. residential construction looks set to expand a little next year, and it could add one- or two-tenths of a percentage point to GDP growth in 2012 -- a mere sliver, but one that would add to the picture of a slowly healing U.S. economy. Every scrap of extra support would help the United States withstand the spreading damage from the crisis in the euro zone, which threatens to push a global slowdown into a deeper and more dangerous recession. China is slowing quickly as its red-hot property market cools and exports to the European Union, its largest trade partner, sink after years of double-digit growth. Its factory sector has contracted for two months in a row and foreign investment in China is falling. Brazil also has stalled and India is contracting sharply. Worldwide, 48 central banks have cut interest rates in the last three months to counter the slump.

Housing Market’s Foundation Looking More Stable - Builders were busier than expected in November, and many are more upbeat heading into 2012. In recent years, housing was supported by temporary help from government tax rebates. Now, the sector looks as if it can stand on its own.  Housing starts jumped 9.3% in November to a stronger-than forecast 685,000 annual rate, and permits rose 5.7% to 681,000. In addition, the housing market index compiled by the National Association of Home Builders rose for the third consecutive month in December. Of course, as with any economic sector, housing has been transformed by the recession. For one thing, the latest readings pale in comparison to record highs posted in the boom years. For another, the mix of projects has changed. During the heydays, builders took hammer and shovel to single-family homes. Now, apartment buildings are showing the most strength. Starts of 5 units or more are up almost 60% so far this year compared to 2010, while single-family starts are down 10%.

Is The Housing Market Poised For A True Recovery This Time? - A number of analysts tell us that the weak housing market has been the main impediment to stronger growth in the broader economy. One recent study advises simply that Housing Is The Business Cycle. Unfortunately, that relationship has only brought trouble in recent years, courtesy of a housing market that fell off a cliff and remained flat on its back. But thinking about residential real estate in something other than a deeply negative light is topical again this morning after reading today's update on housing starts and newly issued building permits for November. Both series posted handsome gains on the month. Yes, we've been here before only to see the apparent rebound sputter out. But the latest rise is accompanied by something else we haven't seen in a while: a rising trend over recent months. Could this be the long-awaited turning point for housing?  No one really knows, but what is clear is that November was a good month for housing activity and that's a start. Housing starts jumped 9.3% last month on an annualized basis as new building permits rose a respectable 5.7%. The bigger news is that both series have been drifting higher since the spring, as the chart below shows.

There Is A Boom Out There Somewhere: Housing Starts Edition - I have been calling for some time for “a kick” in the US economy that would begin with rising auto sales and multifamily starts and then spread throughout the whole economy into a roaring boom. Auto sales have been rising and now multi-family is moving higher,  According to census, 5 unit or more starts are up 16% from last month and up 80% year over year. Right now, multi-family is pulling down 250K SAAR. I still think a rise to mulit-family at 1 million SAAR by late 2012, earl 2013 is completely realistic though unprecedented in the last 40 years. However, I caution that this is not yet the “kick” I am looking for  These stats are all moving in the right direction but for a full on reinforcing cycle we need more. I would also like to see and end to government sector layoffs. This is something that I expected we would see by now, but it looks like we could have more layoffs going into early next year.

60Minutes: There Goes the Neighborhood (CBS News)   Across America, recession-fueled foreclosures and plummeting home values have left countless properties abandoned and vulnerable to looting. As Scott Pelley reports, the problem has gotten so bad in Cleveland, Ohio, that county officials have demolished more than 1,000 homes this year - and plan to demolish 20,000 more - rather than let the blight spread and render nearby homes worthless.  If you thought your home value couldn't drop any more, have a look up and down the block. You might say, "There goes the neighborhood." The new threat from the great recession is the sudden surge in the number of abandoned houses. Vacant homes have become so ruinous to some neighborhoods that one city, Cleveland, decided it had to find a solution.  Perfectly good homes, worth 75, 100 thousand dollars or more a couple of years ago, are being ripped to splinters in Cleveland, Cuyahoga County, Ohio. Here, the great recession left one fifth of all houses vacant. The owners walked away because they couldn't or wouldn't keep paying on a mortgage debt that can be twice the value of the home. Cleveland waited four years for home values to recover and now they've decided to face facts and bury the dead.

Residential Remodeling Index at new high in October - The BuildFax Residential Remodeling Index increased for the twenty-fourth straight month in October to 147.6, a new high for the index. This was up from 141.4 in September, and up 39% year-over-year from 105.8 in October 2010. This is based on the number of properties pulling residential construction permits in a given month. In October 2011, all four regions - West, Midwest, Northeast and South - had gains. The West is at a new all time high, and is up 52% year-over-year. The Midwest is near an all time high, and is up 20% year-over-year. The South is up 11% year-over-year and the Northeast was up from September but is still down 4% year-over-year. This graph shows the NSA index by region. Most of the recent increase is in the West and Midwest. The South is also starting to increase. Note: Permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity.Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year.

NAHB Builder Confidence index increases in December - From the NAHB: Builder Confidence Rises for the Third Consecutive Month Builder confidence in the market for newly built, single-family homes edged up two points from a downwardly revised number to 21 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for December, released today. This marks a third consecutive month in which builder confidence has improved, and brings the index to its highest point since May of 2010. “This is the first time that builder confidence has improved for three consecutive months since mid-2009, which signifies a legitimate though slowly emerging upward trend,” This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the December release for the HMI and the October data for starts (November housing starts will be released tomorrow).  Both confidence and housing starts have been moving sideways at a very depressed level for several years - but confidence seems to be moving up a little now. This is still very low, but this is the highest level since May 2010 - and that boost was due to the housing tax credit. Not counting the tax credit, the last time the index was above this level was in 2007.

Economy Contributes to Slowest Population Growth Rate Since ’40s — The population of the United States grew this year at its slowest rate since the 1940s, the Census Bureau reported on Wednesday, as the gloomy economy continued to depress births and immigration fell to its lowest level since 1991.  The first measure of the American population in the new decade offered fresh evidence that the economic trouble that has plagued the country for the past several years continues to make its effects felt.  The population grew by 2.8 million people from April 2010 to July 2011, according to the bureau’s new estimates. The annual increase, about 0.7 percent when calculated for the year that ended in July 2011, was the smallest since 1945, when the population fell by 0.3 percent in the last year of World War II. The sluggish pace puts the country “in a place we haven’t been in a very long time,” said William H. Frey, senior demographer at the Brookings Institution. “We don’t have that vibrancy that fuels the economy and people’s sense of mobility,” he said. “People are a bit aimless right now.”

Vital Signs: Slowing U.S. Population Growth - U.S. population growth has slowed. America’s population grew by 2.2 million between July 2010 and July 2011 to reach a total of 311.6 million, according to Census estimates. That was the slowest growth rate since the 1940s, reflecting lower immigration and a steep drop in the birthrate. The recession and slow recovery have prompted many people to put off having children.

It's the Private Debt, Stupid -  I've gone on about this elsewhere, but thought I should bring it up front and center here. While everyone hyperventilates about government debt, they don't seem to be aware of the massively greater load of private debt, and its spectacular runup compared to government debt: This from Steve Keen's latest. (It's not very long. There are lots of pictures. It makes every kind of sense. Read the whole thing.) The blue line is publicly held debt -- not including money the government owes itself (on the consolidated budget) for Social Security and Medicare.*† The red line is debt of 1. households and nonprofits, 2. nonfinancial businesses, and 3. financial businesses. Here's how those sectors break out: Again, you hear all sorts of hyperventilating from the morality-based school of economics about households/consumers going on a debt-financed spending binge, especially in the 00s. And that definitely happened. With the financial industry begging them to borrow -- almost literally throwing money at them -- and telling them authoritatively that it's free because house prices always go up, it's not surprising. Humans will be humans; who's gonna turn down money when the powers that be -- who presumably know a lot more about finance than a high-school-educated homeowner working at a lumber mill -- say it's free?

Americans Shedding Debt, Led By Mortgages - Consumers just aren't borrowing like they used to. According to the Federal Reserve, total household debt is falling—albeit slowly—a sign that Americans are chipping away at debt racked up during the boom years. But don't cheer just yet. Although consumers shaved off nearly $40 billion from the collective debt tab in the third quarter of 2011, they still owe more than $13 trillion dollars leftover from the borrowing binge, which includes everything from credit cards to auto loans to mortgages. Still, Americans are getting rid of their debt slowly and surely, especially outstanding mortgage debt, which hit a near five-year low in the third quarter of 2011. That decrease is due to a combination of factors, economists say, ranging from foreclosures, bankruptcies, and simply weak demand for housing. Still scarred from the subprime fallout, banks have also been less willing to lend, further restricting the flow of mortgage credit. "The process is still ongoing," says Greg Daco, economist at IHS Global Insight. "The decline in home prices has reduced movement and activity in the housing market both on the selling side and on the buying side. People don't want to sell because they're waiting for prices to stabilize or go up, and people don't want to buy because they're waiting for prices to continue to fall."

ATA Trucking Index increased 0.3% in November - From ATA: ATA Truck Tonnage Index Edged 0.3% Higher in November The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 0.3% in November after rising a revised 0.4% in October 2011. October’s increase was slightly less than the 0.5% gain ATA reported on November 22, 2011. The latest gain put the SA index at 116.6 (2000=100) in November, up from the October level of 116.3. ...Compared with November 2010, SA tonnage was up 6.0%, the largest year-over-year gain since a 6.5% increase in June 2011. Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index. This index has started increasing again after stalling earlier this year.

Bernanke Prods Savers to Become Consumers - Federal Reserve Chairman Ben S. Bernanke finally may be catching a break: His easy-money policies are showing signs of speeding up the economic rebound three years after he cut interest rates to zero.  “When the Fed sprinkles happy dust on the economy, we always respond,” said Allen Sinai, co-founder and chief global economist and strategist at Decision Economics in New York. “The happy dust has been out there a long, long time, and I think it finally may be settling in some places.”  He sees growth accelerating in the range of 2.5 percent to 2.75 percent next year from 1.5 percent to 2 percent this year, when the economy was hit by what Bernanke called “some elements of bad luck” in a Nov. 2 news conference. These include a run- up in oil prices caused by the Arab spring and a sell-off (SPX) in the stock market triggered by Europe’s debt crisis.

Consumer Sentiment Improves in December - U.S. consumer attitudes were a bit brighter at the end of December compared with earlier this month, according to data released Thursday. The Thomson Reuters/University of Michigan consumer sentiment index for the end of December rose to 69.9 from the 67.7 reading earlier this month and an end-November reading of 64.1, according to sources who have seen the report. The latest reading was better than the 68.0 expected by economists surveyed by Dow Jones Newswires. The current conditions index rose to 79.6 from 77.9 in early December. The expectations index advanced to 63.6 from 61.1. All three indexes were at their highest levels since June.

Final December Consumer Sentiment at 69.9 - The final December Reuters / University of Michigan consumer sentiment index increased to 69.9, up from the preliminary reading of 67.7, and up from the November reading of 64.1. Click on graph for larger image. Consumer sentiment is usually impacted by employment (and the unemployment rate) and gasoline prices. Gasoline prices are falling, but still high, and the unemployment rate is also falling - but still very high. Most of the recent sharp decline was event driven due to the debt ceiling debate, and sentiment has rebounded as expected. Now it is all about jobs - and gasoline prices. Sentiment is still very weak, although above the consensus forecast of 68.0.

Vital Signs: Consumers’ Mood Brightens as 2011 Ends - Consumers ended a tumultuous — and often glum — year on a sunnier note. In December, the Thomson Reuters/University of Michigan Consumer Sentiment Index climbed to 69.9, compared with 64.1 in November. December’s reading was the fourth consecutive monthly rise. That isn’t as high as the January reading, but well above August’s low of 55.7.

Vital Signs: Food-Price Inflation Slows Slightly - Grocery bills last month increased at a slightly slower pace than they had during previous months. The cost of food climbed 4.6% in November from a year earlier, compared with a 4.7% gain in October. The rising cost of basic goods — rent also has been on an upswing — has been a burden on consumers beset with high unemployment and slow income growth.

Personal Income increased 0.1% in November, Spending increased 0.1% - The BEA released the Personal Income and Outlays report for November: Personal income increased $8.5 billion, or 0.1 percent ... in November, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $13.1 billion, or 0.1 percent in November. Real PCE -- PCE adjusted to remove price changes -- increased 0.2 percent in November ... The price index for PCE decreased less than 0.1 percent in November, compared with a decrease of 0.1 percent in October. The PCE price index, excluding food and energy, increased 0.1 percent in November. The following graph shows real Personal Consumption Expenditures (PCE) through November (2005 dollars).  Note: The PCE price index, excluding food and energy, increased 0.1 percent. The personal saving rate was at 3.5% in November. Both personal income and spending were lower than expectations. Using the "two month" method to forecast real Q4 PCE growth suggests an increase of about 2.9% in Q4 - the strongest quarter this year.

Personal Consumption Expenditures: Price Index for November - The monthly Personal Income and Outlays report was published today by the Bureau of Economic Analysis. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation.  The latest Headline PCE price index YOY rate of 2.54% is a decrease from last month's 2.66%. The Core PCE index was unchanged at 1.65%.  I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But PCE is a key measure of inflation for the Federal Reserve, and the price increases in oil and gasoline, although now well off their interim highs, puts consumer behavior in the spotlight.  A core PCE range of 1.75% to 2% is generally mentioned as the target for the Federal Reserve's price-stability mandate.  For a long-term perspective, here are the same two metrics spanning five decades.

''Real'' Disposable Income Per Capita Since 2000 - Earlier today I posted my monthly update of the year-over-year change in the Bureau of Economic Analysis (BEA) Personal Consumption Expenditures (PCE) price index since 2000. My focus was on the PCE index as a measure of inflation.  Now let's look at the PCE data to understand what the latest numbers are telling us about a key driver of the U.S. economy: "Real" Disposable Income Per Capita. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000.  The BEA uses the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000. Do you recall what you we're doing on New Year's Eve at the turn of the millennium? Nominal disposable income is up 46.1% since then. But the real purchasing power of those dollars is up a mere 13.3%. In fact, real disposable personal income is at a level first attained in August of 2006 and remains about 1.7% below the level at the beginning the 2007-2009 recession. Real DPI is just shy of flat for the past 12 months, down 0.9%.

November's Weak Spending & Income Report Clouds Outlook - Disposable personal income (DPI) fell slightly last month while personal consumption spending for November rose by a mere 0.1%, the Bureau of Economic Analysis reports. It's a disappointing report overall and one that adds up to the softest month for spending and income since August. DPI dropped by a scant 0.04%, but it was the first monthly decline since the summer and it's a reminder that the pace of income growth has yet to rebound to levels that prevailed before the summer slump. Consumer spending is doing better but it remains sluggish.  It's not terribly surprising to find that the rate of consumption is slowing. As I've been discussing in recent months, spending has been growing at rates that are too lofty relative to income. As the second chart below shows, there's been a substantial gap between the two when measured on a year-over-year basis. That's unsustainable. Either spending is set to fall or income's growth will rise.

Weekly Gasoline Price Update - A CNBC article posted this afternoon puts the 2011 cost of filling the tank at an average of $4,155 per household, a record. That consumes 8.4% of the median household income, the highest share since 1981.  Here is my weekly gasoline chart update from Department of Energy data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump -- both regular and premium -- dropped six cents over the past week. Regular is now 18.6% off its 2011 interim high set in early May. Premium is down 16.7%. WTIC closed today at 94.12. It is 17.1% off its 2011 interim high, which also dates from early May. As I write this, shows the two non-contiguous states, Alaska Hawaii, with the average price of regular above $4.  The price volatility in crude oil and gasoline have been clearly reflected in recent years in both the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE). For additional perspective on how energy prices are factored into the CPI, see What Inflation Means to You: Inside the Consumer Price Index.

At gas pump, 2011 was the year of the big squeeze -  It's been 30 years since gasoline took such a big bite out of the family budget.  When the gifts from Grandma are unloaded and holiday travel is over, the typical American household will have spent $4,155 filling up this year, a record. That is 8.4 percent of what the median family takes in, the highest share since 1981.Gas averaged more than $3.50 a gallon this year, another unfortunate record. And next year isn't likely to bring relief. In the past, high gas prices in the United States have gone hand-in-hand with economic good times, making them less damaging to family finances. Now prices are high despite slow economic growth and weak demand. That's because demand for crude oil is rising globally, especially in the developing nations of Asia and Latin America. But it puts the squeeze on the U.S., where unemployment is high and many people who have jobs aren't getting raises.

Buyer's Remorse; Record Volume of Returns Before Christmas; $217 Billion Returns Expected, Up 14%. - Christmas shopping is up, but so are returns, before Santa even delivers them. This is not a case of wrong size or bad color, but rather "I found a better deal or I spent too much". MSN Money says Take that back! Returns are big for the holidays People who rushed to snag discounts on TVs, toys and other gifts are quickly returning them for much-needed cash. The shopping season started out strong for stores, but it looks like the spending binge has given way to a holiday hangover. Return rates spiked when the Great Recession struck and have stayed high. For every dollar stores take in this holiday season, they'll have to give back 9.9 cents in returns, up from 9.8 last year. In better economic times, it's about 7 cents. Returns are typically more associated with January than December. . But these days, more is going back before it ever gets to Santa's sack."When the bills come in and the money isn't there, you have to return,"

Retailers Are Slashing Prices Ahead of Holiday - Half off at the entire store at Ann Taylor. Sixty percent at Gap1. Forty percent off almost everything at Abercrombie & Fitch.  Aggressive last-minute deals in the days before Christmas are good for procrastinators, but they could be an alarm bell for the retail industry.  While scattered markdowns are standard every year, discounts across entire stores — which analysts say are more widespread than last year — suggest merchants are stuck with too much merchandise.  “It’s really a game of chicken,” .  Many retailers entered the season “with pretty optimistic plans” that shoppers would rush into stores and pay full price, Mr. Bassuk said. But that did not pan out, and the final days before Christmas have retailers being “much more aggressive in terms of promotions being offered,” he said.  Shoppers are filling their holiday lists against the backdrop of an uncertain year, with stubbornly high unemployment, increased food prices2, volatile gas prices and unpredictability for stocks and Europe’s debt crisis3. The government on Thursday said that third-quarter economic growth had not been4 as brisk as it previously estimated, because of a drop in consumer spending on services like health care.

Number of the Week: Billions in Gift Cards Go Unspent --$41 Billion:

The total amount of money on gift cards that went, or is likely to go, unspent from 2005 to 2011. Gift cards are becoming an increasingly popular holiday present, but as the market grows in value the question of what happens to money that goes unspent still looms large. Some 80% of respondents to a National Retail Federation survey said they planned to buy gift cards during the 2011 holiday season, while for the fifth year in a row they remain the most requested present with 58% of shoppers saying they’d like to receive a gift card. The market for gift cards is growing along with their popularity. Financial-consulting firm TowerGroup estimates that gift-card sales will reach $100 billion in 2011. Consumers aren’t the only ones who love gift cards. The retail industry also has many reasons to embrace them. Stores can’t count money received from the gift givers who purchase the cards as revenue until they’re redeemed, but this offers a number of benefits. First, it sets up a source of cashflow in the weeks after the holidays as recipients make their way to stores to spend the money on their cards.

Many Americans brace for loss of payroll tax cut -Some say they'll spend less on groceries. Others expect to cut back on travel. For many, there would be fewer meals out. Across the country, Americans are bracing for another financial hardship: smaller paychecks starting in January, if Congress doesn't break a deadlock and renew a Social Security tax cut. The tax cut, which took effect this year, benefits 160 million Americans -- $1,000 a year, or nearly $20 a week, for someone making $50,000, as much as $4,272 or $82 a week for a household with two high-paid workers. The tax cut is set to expire Jan. 1. If lawmakers don't renew it for 2012, analysts say the economy would slow as individuals and families looked for ways to spend less. "Of course, it changes my plans," said Craig Duffy, an information-technology worker from Philadelphia and new father of twins. Duffy said his family already has tightened spending, so "we'll have to find a way to cut back."

Uncertainty about uncertainty - Atlanta Fed's macroblog - One of the hotly debated issues among those debating policy in the pages of various Fed publications (virtual and otherwise) is why job creation in the United States cannot seem to break out of its sluggish mode. One potential source is an elevated level of uncertainty about the political and economic future that is damping business enthusiasm for risk and, consequently, holding back the expansion. Heightened uncertainty as an impediment to growth has intuitive appeal to many and, in our Reserve Bank's experience, considerable anecdotal support from business contacts. Fortunately, the work of uncovering the evidence (one way or the other) is under way. One example is a recent entry by Mark Schweitzer and Scott Shane in the Federal Reserve Bank of Cleveland's Economic Commentary series: "In this Commentary, we empirically examine the hypothesis that 'policy uncertainty' adversely impacts small business owners' expansion plans. To do this, we looked at the statistical association between data on small business plans to hire and make capital expenditures and a measure of 'policy uncertainty.' The data on small business plans cover January 1986 through July 2011 and were collected by the National Federation of Independent Business (NFIB)." The picture relating the claims of respondents to the NFIB survey and the uncertainty measure employed by the authors is pretty compelling:

The Labor Market in the Great Recession: an Update - FRBSF  - Since the end of the Great Recession in mid-2009, the unemployment rate has recovered slowly, falling by only one percentage point from its peak. We find that the lackluster labor market recovery can be traced in large part to weakness in aggregate demand; only a small part seems attributable to increases in labor market frictions. This continued labor market weakness has led to the highest level of long-term unemployment in the U.S. in the postwar period, and a blurring of the distinction between unemployment and nonparticipation. We show that flows from nonparticipation to unemployment are important for understanding the recent evolution of the duration distribution of unemployment. Simulations that account for these flows suggest that the U.S. labor market is unlikely to be subject to high levels of structural long-term unemployment after aggregate demand recovers. Full paper (840.30 kb, PDF)

Weekly Initial Unemployment Claims decline to 364,000 - The DOL reports:In the week ending December 17, the advance figure for seasonally adjusted initial claims was 364,000, a decrease of 4,000 from the previous week's revised figure of 368,000. The 4-week moving average was 380,250, a decrease of 8,000 from the previous week's revised average of 388,250. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 380,250. 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: This survey was for the BLS reference week for the employment report, so this suggests an increase in payroll jobs in December (compared to November).

Jobless Claims Drop For Third Straight Week--Lowest Since April '08 - New filings for unemployment benefits dropped again last week, falling 4,000 to a seasonally adjusted 364,000. That’s a relatively modest decline, but it’s encouraging because it follows last week’s big drop that pulled new weekly claims down to a 3-1/2 year low. The fact that the previous tumble didn’t reverse offers one more data point for thinking that the recent slide in jobless claims is the real deal. If so, the outlook for the labor market is somewhat brighter, which of course is the critical variable these days in reading the macro tea leaves for the U.S.  The last time initial claims were this low was April 2008. There’s no assurance that the downward trend of late will continue, but if it does it’s going to get tougher to argue that the labor market isn’t set to grow at a faster rate in the months ahead.

Santa Comes Early, Bringing Good Job News - It has been quite a long time since “strong” and “labor markets” were used in the same sentence. But that occurred Thursday after the Labor Department reported jobless claims in the week ended December 17 fell for the third consecutive week, to 364,000. After looking at the data, economists at Royal Bank of Scotland write, “the recent steady downtrend (the four-week moving average is now at 380,000) suggests a strong labor market heading into year-end.” Claims are now at their lowest since April 2008, and except for one week, they have been below 400,000 since early November. It’s important to remember that claims only give information about firings and layoffs, not about hiring. Even so, Ian Shepherdson, chief U.S. economist at High Frequency Economics, sees reasons to be hopeful for future job gains. “Other things equal, the drop in claims in recent weeks, if sustained, is consistent with private payrolls growth ramping up to about 200,000 per month,” he says. “But if hiring is rising as layoffs slow, then 250,000 ought to be reached before the end of first quarter.”

In a Sign of Labor Recovery, More Workers Are Quitting - THE number of Americans quitting their jobs has begun to rise, albeit from a very low level. That is a tentative sign that labor market mobility, which plunged during the 2007-9 recession, has started to recover. The Labor Department reported this week that 1.9 million workers resigned their jobs in October. In the two years from early 2009 through early this year, there was no month when that many workers quit. But the number has been exceeded eight times this year.  “Quits troughed in late 2009 or early 2010, “ said John Wohlford, the Bureau of Labor Statistics’ branch chief for the Job Openings and Labor Turnover Survey, known as Jolts. “They have recovered some, but we are not anywhere near where we were before the recession.”  The accompanying charts show the trends in the number of new hires, resignations and dismissals in the private sector since the department began conducting the survey in 2000.

The No-Brainer Issue of the Year: Let High-Skill Immigrants Stay - Behind Door #1 are people of extraordinary ability: scientists, artists, educators, business people and athletes. Behind Door #2 stand a random assortment of people. Which door should the United States open? In 2010, the United States more often chose Door #2, setting aside about 40,000 visas for people of extraordinary ability and 55,000 for people randomly chosen by lottery. It's just one small example of our bizarre U.S. policy toward high-skill immigrants. Every year, we allow approximately 140,000 employment visas, which cover people of extraordinary ability, professionals with advanced degrees, and other skilled workers. The number is absurdly low for a country with a workforce of 150 million. As a result, it can be years, even decades, before a high-skilled individual is granted a U.S. visa. Moreover, these 140,000 visas must also cover the spouse and unmarried children of the high-skilled worker, so the actual number of high-skilled workers admitted under these programs is less than half of the total. Perhaps most bizarrely there is a cap on the number of visas allowed per country regardless of population size. How many visas are allocated to people of extraordinary ability from China, a country of over 1 billion people? Exactly 2,803. The same number as are allocated to Greenland.

Manufacturing giant Caterpillar able to dig its way out of a downturn - Caterpillar – or CAT as it is known to its customers, network of dealers and employees – has become something of a poster child for manufacturing since the financial crisis. Western governments would much prefer their populations to be making tractors and trucks than collateralised debt obligations.  It’s a status that Oberhelman isn’t shy about pressing home. Last month, the company issued a press release saying it planned to build a factory employing 1,000 people somewhere in the US. It then sat back. The competition between more than 20 states to secure the factory has been “ferocious”,  . “It’s all production that we don’t do here today – it’s moving from somewhere else,” he explains. The factory will make small tractors and excavators, and the jobs are coming from a plant in Japan. “Why are we doing this? The primary market [for the tractors] is in the US, so we avoid shipping and currency.” A decision will be made on the location of the factory early next year.  . The new factory’s 1,000 jobs will add to the more than 12,000 people Caterpillar has hired in the US since 2010.

The New Blue Collar: Temporary Work, Lasting Poverty And The American Warehouse - Over the past decade and a half, Joliet and its Will County environs southwest of Chicago have grown into one of the world's largest inland ports, a major hub for dry goods destined for retail stores throughout the Midwest and beyond. With all the new distribution centers have come thousands of jobs at "logistics" companies -- firms that specialize in moving goods for retailers and manufacturers. Many of these jobs are filled by Joliet's African Americans, like Dickerson, and immigrants from Mexico and elsewhere in Latin America. But many bottom-rung workers like Dickerson don't work for the big corporations whose products are in the warehouses, or even the logistics companies that run them. They go to work for labor agencies that supply workers like Dickerson. Last year, she found work as a temp through one of the myriad staffing agencies that serve big-box retailers and their contractors. Thanks largely to the warehousing boom, Will County has developed one of the highest concentrations of temp agencies in the Midwest.  As unglamorous as her duties were, Dickerson became an essential cog in one of the most sophisticated machines in modern commerce -- the Walmart supply chain. Walmart, the world's largest private-sector employer, had contracted a company called Schneider Logistics to operate the warehouse. And Schneider, in turn, had its own contracts with staffing companies that supplied workers.

At Wal-Mart a Microcosm of U.S. Inequalities -- Last week, in a column about the new billion-dollar Crystal Bridges Museum of American Art in Bentonville, Arkansas, I mentioned an economist’s estimate that the heirs of Sam Walton, the founder of Wal- Mart Stores Inc., are collectively worth about the same as the bottom 30 percent of all Americans. Alice Walton, who founded the museum, is herself worth about $21 billion.  This imbalance wouldn’t seem so stark if Wal-Mart, whose stock makes up much of the Walton family’s wealth, hadn’t made itself into the world’s largest retailer in part by paying its workers so poorly, and by providing them with only the stingiest health-care benefits -- or none at all.  After the column appeared, I received many e-mails from Wal-Mart workers. Most noted the dissonance between their lifestyles and that of Alice Walton and her siblings.  There were also some criticisms of the column. Felix Salmon, a blogger, took issue with the statistic showing that the six Walton heirs are worth more than the bottom 100 million or so Americans. He wrote: “According to the latest data we have, 24.8% of American households had zero or negative net worth -- add them all together, and get zero."

Pity the Elf Slaves of Online Shipping - Since June, I've been ruining my friends' online-shopping lives. Back then, I reported on a vast warehouse in Ohio where goods bought from online retailers are sorted, boxed, and shipped to consumers. Unsurprisingly, this job does not pay well. A little more surprisingly, this job seems designed to crush employees' spirits. During my visit, two people got fired within 10 minutes, one for talking to someone while he was working—"Where are you from?" was the offending comment—and one for going to the bathroom too much. Why would online retailers be so mean? Well, in the case of many, they have helpfully outsourced interaction with workers. When Walmart started selling its merchandise on the internet, it turned to third-party logistics contractors, or 3PLs, experts who could handle the, uh, logistics, like warehousing and transportation, of online sales. Take Exel, for example, the largest 3PL in the country, and a subsidiary of Deutsche Post DHL, one of the largest companies in the world. Exel alone has 86 million square feet of warehouse all over North America and processes literally millions of goods every single day. Other retailers directly perpetrate the oppression. made headlines earlier this year when 20 current and former employees of its Breinigville, Pennsylvania, warehouse told the local Morning Call that workers were fainting in stifling heat and getting yelled at for not meeting ridiculously high productivity goals and generally being "treated like a piece of crap." Employees who were sent home with heat exhaustion were disciplined

As Wars End, Young Veterans Return to Scant Jobs - Corporal Rhoden, who is 25, gawky and polite with a passion for soldiering, is one of the legions of veterans who served in combat yet have a harder time finding work than other people their age, a situation that officials say will grow worse as the United States completes its pullout of Iraq and as, by a White House estimate, a million new veterans join the work force over the next five years.  Veterans’ joblessness is concentrated among the young and those still serving in the National Guard or Reserve. The unemployment rate for veterans aged 20 to 24 has averaged 30 percent this year, more than double that of others the same age, though the rate for older veterans closely matches that of civilians. Reservists like Corporal Rhoden have a bleak outlook as well.  In July 2010, their unemployment rate was 21 percent, compared with 12 percent for other vets.  “There’s been an upsurge in young people going into the military and not staying for a full 20-year career,” said Jane Oates, the assistant secretary for employment and training at the Labor Department, which has worked to improve the three-day transition assistance program for outgoing soldiers and enlisted companies like Facebook to reach them. “I think transitions have been difficult, with too few jobs out there and lack of clarity about what the employer wants.”

American veterans: A hard homecoming | The Economist - Around 800,000 veterans are jobless, 1.4m live below the poverty line, and one in every three homeless adult men in America is a veteran. Though the overall unemployment rate among America’s 21m veterans in November (7.4%) was lower than the national rate (8.6%), for veterans of Iraq and Afghanistan it was 11.1%. And for veterans between the ages of 18 and 24, it was a staggering 37.9%, up from 30.4% just a month earlier. If demography is indeed destiny, perhaps this figure should not be surprising. More soldiers are male than female, and the male jobless rate exceeds women’s. Since so many soldiers lack a college degree, the fact that the recession has been particularly hard on the less educated hits veterans disproportionately. Large numbers of young veterans work—or worked—in stricken industries such as manufacturing and construction. Whatever the cause, this bleak trend is occurring as the last American troops leave Iraq at the end of this year, and as more than 1m new veterans are expected to join the civilian labour force over the next four years.

Debate Heats Up on Travails of Baby Boomers - The Wall Street Journal’s page-one article Monday about four million Baby Boomers aged 55 to 64 who can’t find full-time jobs seems to have hit a nerve.The hundreds of comments posted about the article, both on the website and on other sites where the story has been reprinted, suggest that readers have deep feelings on the issue.Some write of their anger toward Baby Boomers, blaming them for borrowing too heavily and saving too little, creating a debt problem that will be carried by future generations. They accuse Boomers of being lazy and self-centered and complain that, because they are such a large group, the government is too concerned about their wellbeing.Others decry an economy that allows people to be fired from jobs just as they reach their mid-50s. That is a time when they normally would be earning peak incomes and fattening their retirement savings. Instead, many Boomers without well-paying jobs are spending their late 50s and early 60s running down their savings just to cover the costs of daily life.

The global youth unemployment crisis - When Occupy Wall Street launched, there were hopes and fears that it would recapitulate the Arab Spring. Those hopes and fears sprang largely from a simple fact: that both OWS and the Arab Spring are characterized in large part by angry, unemployed young people. As we come to the end of 2011, it’s worth taking note of the fact that stunningly high youth-unemployment numbers are increasingly a global phenomenon — and that this is a new thing, which postdates the financial crisis, and which doesn’t seem to be improving anywhere. Here are the numbers for a few key Eurozone countries: you can see not only that Spain and Greece have almost unthinkably high youth unemployment approaching 50%, but also that Ireland, in particular, has seen its youth unemployment rate go through the roof since the crisis, from below 10% to over 30%. And don’t think that the US is any better, it isn’t. The US measures youth unemployment once a year, in July, and that series looks like this: The thing to note here is not just the absolute level — youth unemployment is now 18.1%, and for blacks it’s 31% — but also the sharp rise. Countries differ in how they measure unemployment, but however it’s measured, it’s going up alarmingly, and the level in the US is in exactly the same ballpark as the levels we saw in the Middle East which caused the Arab Spring.

Unemployment Insurance Under the Knife The Great Recession officially began four years ago December, and although we may be in the third year of recovery, for more than 13 million Americans without jobs it doesn’t much feel like a recovery. Even as the national unemployment rate inches down below 9 percent, the massive job hemorrhaging that began in 2008 has left a legacy of widespread suffering. Of the 8.7 million jobs lost since December 2007, fewer than 2.5 million have been recovered. With population growth factored in, we are 10.9 million jobs short of what we need to get the nation back to pre-recession levels, when the unemployment rate was 5 percent.Perhaps the most striking feature of this economic catastrophe is the nation’s continuing crisis of long-term unemployment. There are 5.7 million workers who have been unemployed more than six months—an unprecedented 43 percent of all jobless workers. Even more alarming is that a third of the unemployed have been unable to find work for a year or more. The average duration of unemployment is at a record level: 40.9 weeks.

Unemployment Compensation Over Time - The propensity of unemployed people to receive unemployment benefits reached historical highs after the 2008-9 recession and may indicate that benefit rules have more impact on the economy than ever before. The changing aggregate impact of unemployment insurance may be worth considering as Congress debates benefit extensions. Unemployment insurance offers funds, for a limited eligibility period (now up to 99 weeks), to “covered” people who lost their jobs and have yet been unable to find and start a new job. Some economists suggest that unemployment insurance prolongs unemployment because recipients have to give up their benefits as soon as they find and start a new job, or return to working at a previous job. Some economists also say they believe that unemployment insurance stimulates spending because unemployed people are thought to spend most, if not all, of the money they have on hand. But neither of these effects can operate unless people take part in the program. The chart below graphs the recipiency rate — the percentage of people unemployed who are collecting unemployment benefits that week — to 1986. It was calculated from weekly data, then averaged over 52 weeks to remove some of the large seasonal patterns.

What Happens to the Unemployed if There’s No Deal on Jobless Benefits? - About 1.8 million Americans will face a cutoff in unemployment benefits in January if Congress doesn’t extend emergency federal unemployment insurance (UI) before returning home for the holidays, according to estimates from the National Employment Law Project (NELP).  The maps below show the sharp drop in the number of available weeks of benefits across the country. The first map shows the number of weeks of benefits now available through the regular state UI programs and the emergency federal programs (details available here): The second map shows the number of weeks that will be available if the federal programs expire the first week of January.  Note that in six states, workers will have even fewer than the 26 weeks of benefits that state UI programs have historically provided because of cuts that these states made to the regular UI programs this year.

Impasse in Congress: 3 Million Could Lose Jobless Benefits - More than three million people stand to lose unemployment insurance benefits in the near future because of an impasse in Congress over how to extend the aid and how to offset the cost.  Jobless benefits have been overshadowed by debate on a payroll tax cut1, but have become a huge sticking point in negotiations on a bill that deals with both issues.  Republicans would continue aid for some of the unemployed, but would sharply reduce the maximum duration of benefits and impose strict new requirements on people seeking or receiving aid.  Democrats said these changes made no sense at a time when 45 percent of jobless workers had been unemployed for more than half a year and the average duration of unemployment — 41 weeks — was higher than at any time in 60 years.

"I'm Sorry, You're Too Stupid To Collect Unemployment" - The House "reform" of unemployment insurance, which is included in its payroll-tax extension bill, is actually a reduction in benefits. Right now you can collect unemployment insurance up to 99 weeks. Under the House bill, you can collect only up to 59 weeks. By this logic, if you have a loaf of bread and I slice off two-fifths of it then what you're left with is reformed bread.  Or so I thought. But it turns out that this Republican measure actually does include, in addition to the 59-week limit, a few changes to how unemployment insurance is handed out. These will have the effect of reducing spending on unemployment benefits, but that isn't their purpose. Their purpose is to make people who receive unemployment benefits understand that they are losers, and must be stigmatized and harrassed until they prove themselves worthy.

I shall now debunk the "Great Vacation" in one sentence - Chad Stone explains the "Great Vacation" hypothesis: The “Great Vacation” narrative holds that unemployment insurance (UI) benefits...have dissuaded millions of unemployed workers from taking a job.  If...jobless workers would get off their duff (or if we would give them a good swift kick there), unemployment would plummet. Some "neoclassical" economists (e.g. Casey Mulligan) have adopted the "Great Vacation" as their favored explanation for the recession we are in. The story has also made its way into the political discourse, where it is now a regular Republican talking point. I shall now debunk the "Great Vacation" in a single sentence: If the labor demand curve slopes down, then a fall in labor supply should be accompanied by an increase in wages; since wages fell or stagnated in the Great Recession and have grown only slowly ever since, unemployment is not being caused by a decrease in labor supply.

NLRB Fight Shows How Far We've Fallen - The National Labor Relations Board (NLRB) is trying to require big corporations to put up a poster informing their employees of their rights under the law. The big corporate, anti-union organizations are fighting this as hard as they can. They are suing in court to block the rule, while Republicans in the House and Senate are using every trick in the book to stop the NLRB requirement, right down to holding Congressional investigations of the agency, and threatening to defund it, and to shut it down by crippling its Board. Here are the things that the Republicans and the big corporations that fund them are fighting to keep working people from knowing: Under the law you have the right to:

  • Organize a union to negotiate with your employer concerning your wages, hours, and other terms and conditions of employment.
  • Form, join or assist a union.
  • Bargain collectively through representatives of employees’ own choosing for a contract with your employer setting your wages, benefits, hours, and other working conditions.
  • Discuss your wages and benefits and other terms and conditions of employment or union organizing with your co-workers or a union.
  • Take action with one or more co-workers to improve your working conditions by, among other means, raising work-related complaints directly with your employer or with a government agency, and seeking help from a union.
  • Strike and picket, depending on the purpose or means of the strike or the picketing.
  • Choose not to do any of these activities, including joining or remaining a member of a union.

Income distribution charts of the day, middle-class edition -- Ian Ayres has an excellent post at Freakononomics today, explaining some of the background thinking behind his inequality tax proposal: An important goal of our op-ed was to suggest a new unit of measure, “medians” to help us think about what it means to be rich. In 1980, if you earned 3.8 medians, you were in the top 1 percent, but by 2006 even the poorest in the 1 percent club earned 6.9 medians. What we call the “Brandeis Ratio,” the average income of the richest 1 percent (which includes the billions earned by the lucky few) has grown even more disproportionate. As shown in the chart below, in 1980, one-percenters on average made 12.5 medians, but in 2006 (the latest year in which data is available) the average income of our richest 1 percent was a whopping 36 medians. Ayres makes a strong case that there’s a real societal interest in capping this ratio somewhere — “it would be bad for our democracy,” he writes, “if 1-percenters started making 40 or 50 times as much as the median American.” So let’s not tax income; let’s instead tax inequality, and increase taxes on the 1% if and only if inequality is going up rather than down.

The Great Economic Divide Makes Everyone Poorer - The argument that the rich should pay a larger share of our tax bill than the poor does not rest upon fairness alone. As Robert Frank explains in his book The Darwin Economy, requiring the rich to pay a larger share allows us to have more goods and services than we would have with a more equal tax structure – we can make everyone better off – and this improves economic efficiency.  To see how this works, imagine four families sharing a large, jointly owned backyard area. The families would like to install a swing set, slide, etc. for their children to share. The set costs $1,200, and they need to figure out how to pay for it. One of the households is fairly well off and would be willing to pay up to $800 for the swing set. But the other three families struggle to make ends meet, and each is only willing to pay $250. These families really want the swing set – even more than the well-to-do family – but even $250 is a squeeze on their tight budgets. If everyone is asked to contribute equally to the swing set, $300 each, it won’t get purchased since that is more than the poorer households are willing to pay. But there are arrangements that will work. Suppose, for example, that the wealthy family offers to put up half, $600, leaving the other three families to share the remaining $600, or $200 each.

Why Not Just Give Poor People Cash? - Matt Yglesias links over to my post about dredging the submerged state surrounding student loans.  Yglesias notes: “Why not dismantle the submerged state exactly as Konczal suggests, and give the money to poor people? Then people could use the money to buy higher education services or not according to whether or not they thought vendors of said services were, all things considered, offering a reasonable value proposition.” It’s a good question.  We were talking about the relative merits of private or public provisioning of a good.  Yglesias, building on some of the other writing he’s done, argues that the more egalitarian thing to do would be, instead of the state providing certain merit goods, to just give the cash equivalence to poor people and let them use it as they see fit.  We argued before on efficiency grounds why you might not what to do that, an argument similar to the original submerged state post.  There’s another set of related arguments about how certain public goods require coordination, and simply giving people money will under-provision them.  But what else can we point to? I’m still trying to think through this question, but to focus my thoughts I’m going to post three approaches against “giving poor people money” as a baseline approach to the welfare state.

Rising Inequality: Transitory or Permanent? - FRB - We use a new and large panel dataset of household income to shed light on the permanent versus transitory nature of rising inequality in individual male labor earnings and in total household income, both before and after taxes, in the United States over the period 1987-2006. Due to the quality and the significant size of our dataset, we are able to conduct our analysis using rich and precisely estimated error-components models of income dynamics. Our main specification finds evidence for a quadratic heterogeneous income profiles component and a random walk component in permanent earnings, and for a moving-average component in autoregressive transitory earnings. We find that the increase in inequality over our sample period was entirely permanent for male earnings, and predominantly permanent for household income. We also show that the tax system, though reducing inequality, nonetheless did not materially affect its increasing trend. Furthermore, we compare our model-based findings against those of simpler, non-model based inequality decomposition methods. We show that the results for the trends in the evolution of the permanent and transitory variances are remarkably similar across methods, whereas the results for the shares of those variances in cross-sectional inequality differ widely. Further investigation into the sources of these differences suggests that simpler methods produce erroneous decompositions because they cannot flexibly capture the relative degree of persistence of the transitory component of income.

Services offshoring increases wage inequality Offshoring from industrialised countries always evokes hot debate in public and academic circles. Worries concern a loss of employment opportunities in unskilled jobs at one point, and in high-skilled jobs at another. Other worries concern the suspected devaluation of unskilled labour.This column explores the case of UK firms between 1992 and 2004, recognising that offshoring in one particular industry may also affect labour demand in other industries. It suggests that services and materials offshoring increase the wages of high-skilled workers and decreases the wages of low- and medium-skilled workers, thus contributing to a rising wage inequality.

Finally, Republicans Find Their New Welfare Queens - If you’ve been watching the Republican presidential debates, you’ve likely heard a surprising amount of talk about welfare reform. Both Newt Gingrich and Rick Santorum identify the 1996 law, which the Republican Congress eventually forced President Clinton to sign, as their signature achievements, emblematic of the kind of policies they would pursue as president. Even the logic, if you can call it that, behind Gingrich’s proposal to have schoolchildren work as janitors is lifted straight from the most extreme rhetoric of welfare reform: that poor kids live in neighborhoods where no one at all works, and thus need to be exposed to real labor. The problem for Republicans after the welfare reform law passed was that, having achieved the victory, they no longer had the issue: The specter of the non-working poor could no longer be reliably evoked, and nothing with a similar power to divide voters has emerged to take its place. They tried going after the “lucky duckies,” those people who pay no federal income tax, but that hasn’t really caught on. Affirmative action has faded as an issue. But now they seem to have found it, in the most unlikely of programs: Unemployment Insurance. The legislation to extend the payroll tax cuts that passed the Republican-controlled House on Wednesday brings the full arsenal of welfare reform gimmicks to the UI program: Time limits; drug tests; requirements to seek work or enter an education program.

Census shows 1 in 2 people are 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."

Concentrated Poverty - Cleveland Fed - Although the U.S. poverty rate was the same in 2000 as it was in 1970, the geographic distribution of the poor has become more concentrated. A higher concentration of poor in poor neighborhoods is a concern because it may mean the poor are exposed to fewer opportunities that affect their outcomes in life, like employment and income. We show where and how poverty has become more concentrated in the United States, and who is most likely to be affected.

Homeless women 'die by age 43' on average - Homeless men live to an average age of 47 while women who live rough generally die four years earlier, new figures show. Researchers found people who live rough are likely to die more than 30 years earlier than the average British person.  According to new figures homeless people will die in their 40s - men on average at 47 while women have a life expectancy of 43.  The homeless life expectancy rate compares to that in the Democratic Republic of the Congo, central Africa. In stark contrast, the average age of death for the general population in Britain currently is 77 years.  Separate figures, meanwhile, have shown that almost 70,000 children will wake up on Christmas Day in temporary accommodation, without a home to call their own.  Campaigners described the figures as "shocking" and said they were an appalling indictment on modern British society.

QC Homeless Remembered On Eve Of Solstice - Quad Citians gathered together Wednesday morning in Davenport to honor National Homeless Persons Day. The memorial is planned every year on the eve of the winter solstice, the day before the Quad Cities homeless population has to spend the longest night of the year outside.  "It's the longest night of the year, so that's symbolic of the struggles that people who are experiencing homelessness go through." There are dozens of shelters all over the Quad Cities and surrounding communities but those fill up fast during the winter months. The Memorial not only served as a way to remember those left out in the cold but also provides an opportunity to raise awareness and ask for help. "It's a problem that's kind of invisible at times in the Quad Cities. So we want to maintain visibility. We want to give the general public the opportunity to help."  At this time last year, there were more than 320 Scott County residents living on the streets. Participants held a vigil until noon as shelter employees community-wide quietly remember the homeless that have passed. This years event memorialized13 of Quad City's homeless who have died in the last year.

Homeless kids in U.S. number 1.6 million: study - Fully 1.6 million children in the United States — one in 45 kids — were homeless last year, living in shelters, cars, abandoned buildings and parks, a study released Monday found. With youth homelessness surging 28 percent since 2007 amid tough economic times, the National Center on Family Homelessness called its study a “call to action for all of us to address child homelessness before we lose another generation.” The situation is grim nationally, but even worse in many states. Half of all US homeless kids live in six US states, and among the worst hit of all were Georgia, Alabama and California, the most populous US state. Of the children affected, 42 percent were under the age of six, and a third of them were living with single mothers with chronic illnesses, the study found. Homeless children were more likely than others to suffer from hunger, educational problems, stress and illness among other challenges, it said.

Vacant Homes Pose Problems - Clark County officials say abandoned homes across the Las Vegas valley are a haven for criminal activity. Officials are urging people to report suspicious behavior at those homes but some neighbors say they aren't getting any results. The county reports there is no task force in place to follow up on reports that come into them and budget cuts are leading to a backlog of complaints. "This one has been vacant for three or four years now and full of people coming in and out every single day, different people, there's broken windows and they throw bottles," said Espinoza. She often reports suspicious activity around several vacant homes in her neighborhood but says, it seems, nothing changes.County officials say they are working on a foreclosure registry that would keep tabs on some of the problem properties.

Study: Nearly 1 in 3 will be arrested by age 23 - Nearly one in three people will be arrested by the time they are 23, a study to be published today in Pediatrics found. "Arrest is a pretty common experience," says Robert Brame, a criminologist at the University of North Carolina-Charlotte and principal author of the study. The new data show a sharp increase from a previous study that stunned the American public when it was published 44 years ago by criminologist Ron Christensen. That study found 22% of youth would be arrested by age 23. The latest study finds 30.2% of young people will be arrested by age 23. Criminologist Alfred Blumstein says the increase in arrests for young people in the latest study is unsurprising given several decades of tough crime policies.

America Has Now Reached “Peak Imprisonment” -  Despite our supposed love of individual liberty, America has long been known for having by far the highest incarceration rates among the world’s developed nations. Some would argue that this is a good thing, as shown by the country having 20 years of continually declining crime rates. More criminals in jail = less crime on the streets. That just makes sense, they would argue. But it also come at the terrible price of non-violent drug offenders being incarcerated for long periods, as well as the tremendous monetary cost to the taxpayers of housing such a large percentage of our adult population as wards of the state. Not surprisingly, as the ravages of the Great Recession continue to hammer governmental budgets at every level, the states and even the federal government are becoming less inclined to place people behind bars and to keep themthere for long periods of time. Here is the Economist with the details:

Heat not bombs - For most in the northern parts of the country, preparing for winter means making sure your oil tank is full, checking your storm windows or sticking sheets of plastic over your windows and plugging any new drafts. But, this year, it might be time to take the fight to stay warm to Washington, D.C. Why? Because inside that cold, cold Beltway, they are spending money on war instead of keeping Americans warm! Sounds simplistic? Well, listen to this. The price of fuel is going up. USA Today reported in October that “homeowners who use heating oil will see their bills rise 12% to $2,124 from $1,906.” Folks who heat with propane or natural gas are also going to see increases. At the same time, more Americans are slipping (try “plummeting,” “careening”) into poverty. According to census data, another 2.6 million people joined “the poor” last year making the official count of poor people in the United States 46.2 million—the highest number in half a century.  In 2011, the United States allocated $4.7 billion to fuel assistance programs throughout the country. For 2012, the Obama administration proposed a 45 percent cut in these home-warming, life-saving funds—suggesting $2.57 billion for heating assistance in 2012.

State Unemployment Rates "generally lower" in November - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally lower in November. Forty-three states and the District of Columbia recorded unemployment rate decreases, three states posted rate increases, and four states had no rate change, the U.S. Bureau of Labor Statistics reported today. Nevada continued to record the highest unemployment rate among the states, 13.0 percent in November. California posted the next highest rate, 11.3 percent. North Dakota again registered the lowest jobless rate, 3.4 percent, followed by Nebraska, 4.1 percent, and South Dakota, 4.3 percent. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). Every state has some blue - indicating no state is currently at the maximum during the recession. The states are ranked by the highest current unemployment rate. Seven states and the District of Columbia still have double digit unemployment rates.

Philly Fed State Coincident Indexes increase in November - From the Philly FedThe Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for November 2011. In the past month, the indexes increased in 44 states, decreased in four, and remained unchanged in two (Hawaii and Wyoming) for a one-month diffusion index of 80. Over the past three months, the indexes increased in 43 states, decreased in six, and remained unchanged in one (Hawaii) for a three-month diffusion index of 74. Note: These are coincident indexes constructed from state employment data. This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In November, 45 states had increasing activity, up from 44 in October. This is the highest level since April.  Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession, and all green earlier this year - but this is an improvement from a few months ago.

States brace for loss of extended jobless program - A handful of states would be hit harder than others by the looming expiration of long-term unemployment insurance benefits, according to an analysis by economists at IHS Global Insight. The decision to renew the emergency program, which provides federal funding to extend weekly unemployment benefits for up to 99 weeks in some states, is in limbo as Congress deadlocks once again over a year-end package of budget bills. A Senate-approved bill that would have renewed the program for two months collapsed Monday after House Speaker John Boehner, facing a revolt from conservative members, walked away. Failure to renew the program would hurt millions of families struggling to get by, cut consumer spending and take a bite out of economic growth nationwide. But the pain would be felt most sharply in a handful of states where benefits payments have had the biggest impact on local spending, including Nevada, New Jersey, Oregon, North Carolina, Rhode Island, Pennsylvania, Michigan, Washington, California and Connecticut. “Every state has seen some benefit from the (emergency unemployment insurance) program, but for the ones that need it most the impact on income is even more significant,”

Monday Map: Unemployment Insurance Tax Rates - Today's map shows the lowest and highest marginal unemployment insurance tax rate in each state. These are taxes levied on a portion of a worker's wages, paid (in most cases) by employers (though the actual economic incidence is on both employer and employee.) The wage base varies greatly from state to state; the lowest is $7,000 (in AK, CA, and FL) and the highest is $37,300 (in WA.) For more on UI taxes, read our latest background paper, "Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds"

Vital Signs: Slower Growth in State Tax Revenue - State tax revenue has slowed its rate of growth. In the third quarter, states saw their overall tax revenue increase 5.6% from the same period a year ago. That wasn’t as brisk a pace as in the previous few quarters, but marks another period of year-over-year growth. While state revenue is healthier than in the recession, there is much ground to regain.

A Tale of Two States - Earlier this month, on December 5, California Governor Jerry Brown and New York Governor Andrew Cuomo both announced that, even though state revenues in general were rebounding, they were both facing budget shortfalls.   Both governors announced a desire to respond to forecast budget deficits with tax changes, including increasing income taxes on high income households.  But that is where their tales part ways.  Last year, throughout the budget season, Brown couldn’t get the legislature to extend  California’s expiring tax increases  Well, after a bumpy summer and even bumpier fall, the Legislative Analyst’s Office projected actual revenues will fall $3.7 billion below forecast and help produce a 2012-2013 budget shortfall of $13 billion. That would trigger the large automatic cuts in higher education, social services, and K-12 education. In response Brown announced that he’ll bypass the legislature and   ask voters to approve a retroactive tax increase in November 2012.  In contrast, Cuomo proposed comprehensive reform of New York’s tax code.  Although he has cut spending and won concessions from labor unions, the state still spends more per capita than nearly all other states and it faces  a $350 million shortfall for this year and a projected $3.5 billion deficit next  year. 

California leaders say time for cuts may be ending - California's dark days of budget deficits and severe spending cuts may be nearing an end. Since the economic collapse in 2008, state leaders have seen a steep drop in tax revenue that had them jostling to keep public services intact in schools, universities, prisons and aid to the poor, disabled and sick. General fund spending has dropped by $17 billion since 2007 - from a high of nearly $103 billion - and the cuts continued as recently as last week when Gov. Jerry Brown announced another $1 billion reduction to programs serving California's 37.5 million residents. And the Democratic governor warned the bad news wasn't over: Next month he'll unveil a budget proposal with yet more spending cuts. But the state may be hearing the final drumbeats of this bad news. The ongoing deficit continues to shrink: At its worst it was $42 billion in 2009. Now it's projected to be $13 billion through the next fiscal year. A combination of more cuts in coming months along with Brown's proposal to ask voters to raise tax revenue next November could lift the state out of the red in the next 12 months, lawmakers and budget analysts say.

Pennsylvania expects $500 million budget deficit - Gov. Tom Corbett’s top budget aide says the state is projecting a $500 million deficit at the midpoint in its fiscal year, and he’s working up a plan to freeze state some spending to deal with the shortfall. Budget Secretary Charles Zogby told reporters today that the state government continues to struggle with a weak economy as well as pension, debt and health care costs. Zogby didn’t say how much spending will be frozen, but that Corbett will decide based on choices the budget secretary outlines. He says next year’s budget may be more painful than this year’s, which was enacted moments before midnight on June 30. That $27.2 billion spending plan cut education aid but didn’t raise new taxes.

Bloomberg Bird-Dogs Meredith Whitney’s Terrible Call - Remember Meredith Whitney’s apocalyptic predictions on the municipal-bond market last year? Bloomberg News does. And it makes sure Whitney and its readers do too. Whitney last year predicted a catastrophe in municipal bonds—hundreds of billions of dollars of defaults this year as state and local governments failed to make payments on their supposedly crushing debt burdens. She triggered a panic in the muni markets with a call that she wouldn’t or couldn’t back up, as Bloomberg pointed out back in February in a great piece: “Quantifying is a guesstimate at this point,” she said. “I was giving an approximation of a magnitude that will bear out to be correct“…  “A lot of this is, You know it, but can you prove it?” Whitney said . The sector Whitney predicted would collapse has instead been the best-performing part of the markets of the past year, up a tax-exempt 10.5 percent, Bloomberg reports.

US Cities Going Bankrupt In Economic Crisis - With less than a year to go until America elects its next president, the country has been warned of a looming new economic crisis. Major cities across the United States are declaring themselves bankrupt in the face of huge debts and declining revenues. Birmingham, in Alabama, and Harrisburg, the state capital of Pennsylvania, are the latest high-profile cities to file for bankruptcy. Analysts warn as many as 100 American cities are at risk. They are taking their lead from a scenic Californian city which has become the poster child for the blight of municipal bankruptcy. Vallejo, home to 115,000 thousand perched on wooded hills across the water from San Francisco, has just emerged from three years in bankruptcy but still bears the scars. Public services were slashed. Half the fire department were laid off, the police force cut by a third and libraries, parks, senior citizens services all drastically reduced."We've created a situation where the city of Vallejo has become very attractive for criminals because it just doesn't have the police officers," restaurant

Cleveland = The New India? - My Economics Professor in MBA School, Peter Klein, lectured fondly of the Indian (as in subcontinent, not AmerInd) "entrepreneurs" who risked life and limb going through rubbish heaps looking for scrap metal and other items that could be sold. Despite the risk—I'm not writing metaphorically when I say "risked life and limb"—it was the best opportunity they had of making a better life for themselves. Apparently, that Indian entrepreneurial spirit (or, as Newt Gingrich might call it, "work ethic") is being mirrored these days in Cleveland. But now a former county treasurer wants to put a stop to it: [Former Cuyahoga County Treasurer] Jim Rokakis: We're looking at a neighborhood that has almost as many vacant houses awaiting demolition as there are houses with people living in them. We have one here. One here. One here. One there.
Scott Pelley: It's a nice house from the roof to about here. And then down here it's been ripped to pieces. What's goin' on?
Rokakis: Well this is typical because this is as high as they could reach without using ladders. They ripped off the aluminum siding, which you'll see on most of these houses. The aluminum and the vinyl siding comes off. It's getting' about a buck a pound.

Detroit's debt crisis even worse than thought, state's review reveals -- A state financial report released Wednesday moved Detroit closer to appointment of an emergency manager and painted a bleak picture of a city digging an ever-deeper hole by taking on long-term debt to pay its everyday bills. The findings by the Treasury Department trigger a more in-depth study by a team of state-appointed officials and set the stage for a possible consent agreement that would head off a state takeover. City Council President Pro Tem Gary Brown warned that the city could be broke if it waits for Gov. Rick Snyder to name an emergency manager and called for immediate negotiation of a consent agreement. "We need to give unions the motivation to accept meaningful cuts in health care and pension benefits before we are run into bankruptcy,"

Occupy Education - It’s not only in New York City that the Occupy spirit has invigorated education activists. In late November Occupy Rochester, along with parents and other community activists, disruptively mic-checked a school board meeting to protest an undemocratic process for selecting a new school superintendent, a process that involved a corporate search firm. In Chicago, on the same day as the Queens PEP meeting, protesters shut down a school board meeting to protest recent failed reforms. Like New York, Chicago has been shutting down failing schools and replacing them with new ones, often charter schools. As in New York, many of the new schools perform even worse than the old ones. Parents and teachers mic checked the meeting, yelling, “You have failed Chicago’s children…. These are our children, not corporate products!” Two days later, protesters occupied the lobby of New Jersey’s Department of Education, protesting Governor Chris Christie’s efforts to open more charter schools in the state.

L.A. schools' healthful lunch menu panned by students -  For many students, L.A. Unified's trailblazing introduction of healthful school lunches has been a flop. Earlier this year, the district got rid of chocolate and strawberry milk, chicken nuggets, corn dogs, nachos and other food high in fat, sugar and sodium. Instead, district chefs concocted such healthful alternatives as vegetarian curries and tamales, quinoa salads and pad Thai noodles. There's just one problem: Many of the meals are being rejected en masse. Participation in the school lunch program has dropped by thousands of students. Principals report massive waste, with unopened milk cartons and uneaten entrees being thrown away. Students are ditching lunch, and some say they're suffering from headaches, stomach pains and even anemia. At many campuses, an underground market for chips, candy, fast-food burgers and other taboo fare is thriving.

Homelessness a problem for many schools — The number of Michigan students without a permanent address has risen dramatically as families lose homes through foreclosure and other strife, a newspaper reported Sunday. More than 31,000 students were considered homeless during the 2010-11 school year, compared to 7,500 during the 2007-08 year, the Detroit Free Press reported, citing statistics from the Michigan Department of Education. “It doesn’t matter how great your teacher is. If you go to five schools in a year, or no school at all, you won’t learn,” Students with no permanent address are living with relatives or friends, or at shelters and motels.

Texas Schools Grapple With Big Budget Cuts - School funding in Texas is in turmoil. State lawmakers slashed more than $4 billion from education this school year — one of the largest cuts in state history — and more than 12,000 teachers and support staff have been laid off. Academic programs and transportation have been cut to the bone. Promising reforms are on hold or on the chopping block. Next year, the cuts could go even deeper. Schools in Pasadena, just outside Houston, have seen tight budgets before, but never like this. There was $21 million in cuts this fall alone and 340 positions eliminated, Candace Ahlfinger, an associate superintendent of schools in Pasadena, says. Of those cuts, about 180 were teaching positions and 160 were support staff, she says. Special education teachers who worked with dyslexic kids: gone. Teachers' aides: gone. Dozens of bus drivers, crossing guards and security personnel: gone..

Cutting Pell Grants Is Unnecessary and Unwise - The appropriations agreement for fiscal year 2012 that Congress finalized last weekend included some harmful changes to the federal Pell Grant program, which helps nearly 10 million low- and moderate-income students afford college.  While the deal omits the most severe Pell Grant cuts in an earlier House-approved bill, it will still make it harder for many low-income students to afford college. The Institute for College Access & Success (TICAS) estimates that more than 100,000 students will lose their Pell Grant entirely next year because of a retroactive cut in the number of semesters for which a student can receive a Pell Grant; thousands more will lose part or all of their grant due to other provisions in the appropriations agreement. Pell Grants have been under pressure in this year’s budget process, for two reasons.  First, the Budget Control Act placed restrictive caps on overall discretionary funding starting in 2012, forcing Congress to find savings among these programs.  Second, Pell Grants in 2012 require an additional $1.3 billion over the 2011 funding level in order to continue serving all of the students who qualify.

UConn trustees OK 17-percent hike in school costs - University of Connecticut trustees voted without dissent Monday to approve an increase in tuition and other student costs totaling 17 percent, which will be phased in over four years starting next fall under a plan to hire more faculty. The measure approved on a voice vote is designed to raise about $50 million by increasing tuition and other fees by between 6 percent and 6.8 percent annually, from the current level of $10, 670 for an in-state student to $11,902 next year and $13,130 in the 2016 fiscal year. Room and board also will increase by 3 percent each year. The total yearly cost of attending UConn, currently $21,720 for Connecticut residents, will increase to $22,430 next year and to $25,518 in 2016, according to the school. Out-of-state students, who currently pay $38,616, would pay $47,070 in 2016. The increase comes on the heels of state budget cuts that slashed funding to UConn by $25 million.

Colo. students shoulder bigger share of public college cost - As state lawmakers contemplate another round of budget cuts for higher education, officials say the students are picking up a bigger portion of the cost than ever. A decade ago, the state picked up more than two-thirds of the cost of providing public college courses. Today, the students pay two-thirds, and the state picks up one-third. Some officials fear the state's share may eventually become zero. "That's clearly where we're going," Lt. Governor Joe Garcia said. "If things don't change at all, it could be a matter of a few years." That would increase an already growing burden on students. The average tuition for an in-state student at a four-year public university in Colorado went up from $3,128 to $8,370 in the past decade. Despite that, the state's higher education system has more students enrolled than ever before.

Colleges pay presidents millions while raising tuition - Some private colleges are paying their top executives millions of dollars, at the same time they're hiking tuition prices for students. Vanderbilt University paid its chancellor, Nicholas Zeppos, $1.9 million in 2009, according to the school's most recent tax filings -- enough for up to 43 students to attend Vanderbilt at current prices. His total pay includes a base salary of $673,002, as well as bonus and other compensation. That same year, Vanderbilt's tuition jumped 4.3%. Since then, the college has hiked tuition more than 3% annually, and now totals $41,332, according to the university. Quinnipiac University, located in Hamden, Conn., is in the same boat. Its president, John Lahey, made $1.2 million in 2009, including base pay of $760,706, according to tax documents. Meanwhile, the college raised tuition and fees nearly 5% that year, and more than 5% each year after. Students now pay $36,130 a year to attend. Emory University, in Atlanta, and Houston-based Rice University also paid their presidents more than $1 million in 2009 while raising tuition nearly 5%. Both schools have also hiked tuition during the past two years.

Guys' Grades Suffer When College Football Teams Win - A strike against those arguing for the benefits of successful college football programs, college male's grades tend to go down when their university's football team wins games, new research finds. And it happens as a direct result of the boozy culture surrounding football programs. More victories means more celebratingw which means less studying.  Looking at University of Oregon student transcripts over 8 year and football wins over that same period, researchers Jason M. Lindo, Isaac D. Swensen, Glen R. Waddell calculated that a 25 percent increase in the football team's winning percentage leads males to earn GPAs as if their SAT scores were 27 points lower. Yet, the researchers admit this does not take into account grade inflation over the years. But, as you can see in this chart below, as team wins go-up, male GPA suffers.

Out of Harvard, and Into Finance -Given the efforts at some of the top schools to guide their students away from Wall Street and into public service, I’ve been wondering whether the career choices of the nation’s young elites have changed much in the last few years. I’ve gathered some data from three elite schools known for sending a lot of students into finance: Princeton, Yale and Harvard. Each school categorizes the jobs of its graduating seniors in different ways, so we can’t compare them to one another. But we can look at within-school trends to see how student choices are changing over time. Note: The percentages below refer to students who actually had jobs, and so for the most part exclude students who were unemployed or in graduate school. Since I’m a proud Tiger, let’s start with Princeton, which sent me data going back to 2000. The share entering finance jobs is in yellow, and I’ve included exact percentages for some of the more popular industries:  Of Princeton seniors who had jobs lined up after graduation, 35.9 percent went into finance in 2010 (the most recent year available). That’s a very large share, but still lower than the peak of 46 percent in 2006.

Risk and the Indentured Servitude of Student Loans - Yesterday ( Risk is Necessary for Adaptation, Innovation and Success) I discussed the inevitable failure of systems in which risk has been transferred from those who reap the gain to others. In the case of student loans, the risk has been transferred to students who enter decades of indentured servitude. Indentured servitude has a long history in the U.S.; many immigrants accepted servitude of between two and seven years in exchange for passage to the New World. Orphans were indentured out of orphanages to the age of 21--potentially a much longer servitude. Indeed, the labor of anyone on the public dole could be auctioned off: From Wilma A. Dunaway's Online Archive: By the time of the Revolutionary War, indentured servitude had been a common practice in the United States for 150 years. Let us consider the modern form of indentured servitude, student loans, which now exceed a staggering $1 Trillion: "It's Going To Create A Generation Of Wage Slavery"(Zero Hedge), or perhaps more accurately, indentured servitude, because the debt cannot be dismissed via bankruptcy. Student loans outstanding will exceed $1 trillion this year (USA Today):

Cuts for the Already Retired - Retired police and firefighters from Central Falls, R.I., have agreed to sharp pension cuts, a step thought to be unprecedented in municipal bankruptcy and one that could prompt similar attempts by other distressed governments. If approved by the bankruptcy court, the agreement could be groundbreaking, said Matthew J. McGowan, the lawyer representing the retirees. “This is the first time there’s been an agreement of the police and firefighters of any city or town to take the cut,” he said, referring to those already retired, who are typically spared when union contracts change. “I’ve told these guys they’re like the canary in the coal1 mine. I know that there are other places watching this.”

Report: 82% Chance California Pensions Are Going Under (and You’ll Be Next) According to a recent study there’s an 82% chance that California pensions will run out of money.Who didn’t see this one coming? 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. The study, conducted by Stanford Professor Joe Nation along with California Common Sense, covered all three of the state’s largest pension systems. Source: ForbesCalifornia’s pension system is living in a fantasy world where investment returns average 12.5% annually and there’s enough money for everyone. The largest union, CalPERS, has a 82% chance of a budget shortfall in the next 16 years.

Should You Wait to Take Social Security? - Does it pay to delay taking Social Security benefits?  Let's say you're considering one of three options: taking early retirement at Age 62, retiring at the traditional Age 65, or really holding off on retiring until you've reached Age 70. Which choice might be better for you?  The question matters because people who wait longer before drawing Social Security benefits can draw larger benefits than those who don't wait.  To find the answer, we've tapped Social Security's estimate of the maximum possible Social Security benefits that would be paid for individuals choosing to begin receiving payments in the first month after they've reached each of these ages in January 2012.  We then projected the accumulated total amount of benefits each individual would receive all the way out to Age 100.  But since most Americans won't live quite that long, we also projected how much longer a typical American can expect to live once they've reached the age at which they begin receiving Social Security benefits.

Medicaid cuts stun N.J. nursing homes - Nursing homes that care for the sickest of patients should have been paid more this year under a new Medicaid reimbursement formula. But because of state budget cuts, it didn't turn out that way. Instead, some nursing homes that had been slated for a substantial boost in reimbursements were warned last summer to brace for a 3 percent cut — only to be told in the autumn that their rates would be slashed by more than twice that proportion. Like all things related to nursing-home finances, the reason is complicated — so much so that long-term center operators and their advocates were themselves caught off guard by the realization that a change meant to protect some nursing homes' bottom lines jeopardized others. "Everyone had been told to expect a 3 percent cut, but some of our members suffered as much as an 8 percent cut," said Paul Langevin, president of the Health Care Association of New Jersey, which represents more than 300 long-term care centers. "That's a pretty dramatic difference, especially when you learn about it after you've already planned your budget and staffing levels for the year."

Ryan Wyden Psychosis - In this must read post Ezra Klein asked Ron Wyden and Paul Ryan for evidence that forcing the CMS (Medicare/Medicade) to compete more with private insurers can be used to reduce health care spending. The logic must be that the private sector is better able to control costs so private insurers can insure for less, and, if they must compete, will do so.  They answered* pointing to competition in the Federal Employee Benefits Program. Klein counters noting that costs have risen as fast for the FEBP as for employee health insurance plan which don't ask employees to chose between competing offers. Note those other plans, the ones without competition, are mainly used by private profit maximizing firms.  To support their claim that private firms are better at controlling costs than the Federal Government, they pointed to a Federal Government program, and just assumed that it is more efficient than the approach taken by profit maximizing firms. So the proof that the private sector can do it better than the Federal Government is based on the assumption that the Federal Government must be doing it better than the private sector.

The Wyden-Ryan Plan: Déjà Vu All Over Again - After wrestling for decades and in futility with the triple problems facing health care in the United States – unsustainable spending growth, lack of timely access to health care for millions of uninsured Americans and highly varied quality of care – any new proposal to address these problems is likely to be a recycled old idea. The widely discussed new proposal from Senator Ron Wyden, Democrat of Oregon, and Representative Paul D. Ryan, Republican of Wisconsin, to restructure the federal Medicare program for the elderly is no exception. The idea – generally known as “managed competition” — goes as far back as 1971, when Dr. Paul Ellwood and his colleagues at the Health Services Research Center of the American Rehabilitation Foundation injected it into President Nixon’s attempt at health reform. Since then, the idea has appeared and reappeared in health reform in many variants and with different names, too numerous to permit a full listing here. Its most sophisticated renderings can be found in the extensive writings on the concept by the Stanford economist Alain Enthoven. To describe the unifying theme running through these past variants, it is helpful to enumerate the major economic functions any health system must perform:

Medicare doctors face 27.4% pay cut come January - The payroll tax impasse in Congress has put Medicare doctors on edge over the likelihood that their pay could be slashed 27.4% in two weeks time. Under current law, health care providers to the nation's 45 million Medicare beneficiaries -- including physicians, nurse practitioners, physical therapists and podiatrists -- face reduced government reimbursement payments on Jan. 1. But the payroll tax cut bill also includes a "patch" that would have prevented the Medicare payment cuts from occurring in the New Year. The problem is that the bill, passed by the Senate, has been rejected by the House -- and both chambers of Congress, for now at least, have recessed for the year. Dr. Robert Wergin, a family physician who operates a solo practice in Milford, Neb., is worried. "I like to think these politicians are intelligent people and they will come to their senses," Wergin said. "Now I'm worried that maybe they won't."

Essential Health Benefits and cost benefit analysis: can we maintain doctors' incomes and provide decent care for all? - Linda Beale - So we thought we had finally created a national system of health insurance that would permit near-universal coverage for essential health benefits to every American.  But the Obama administration says it is not going to write rules regulating exactly what benefits must be covered.  Again bowing his head to the GOP personal responsibility/states' rights mantras, the president is willing to let states "experiment" like they do with Medicaid. This goes back to the recommendation from a panel at The National Academic of Sciences, which said that the federal government should take cost into consideration in deciding what's essential to be provided by health insurance plans under the reform act and that new benefits should be 'offset' by cost cutting elsewhere. Robert Pear, Panel Says U.S. Should Weigh Cost in Deciding 'Essential Health Benefits'", But a primary problem with cost-benefit analysis as typically understood is that it favors the status quo because any new benefit for which money must be expended will cost compared to the current system, and the benefit is much harder to turn into a quantitative number that will prove that the cost is worth it.  It is very hard to do truly 'dynamic' cost-benefit analysis--the assumptions used tend to be a one-size-fits-all and it is hard to calculate the way that the immediate benefit builds even more substantial long-term benefits and then result in much lower costs down the road,

Politifact, R.I.P. - Krugman - This is really awful. Politifact, which is supposed to police false claims in politics, has announced its Lie of the Year — and it’s a statement that happens to be true, the claim that Republicans have voted to end Medicare. Steve Benen in the link above explains it, but let me just repeat the basics. Republicans voted to replace Medicare with a voucher system to buy private insurance — and not just that, a voucher system in which the value of the vouchers would systematically lag the cost of health care, so that there was no guarantee that seniors would even be able to afford private insurance. The new scheme would still be called “Medicare”, but it would bear little resemblance to the current system, which guarantees essential care to all seniors. How is this not an end to Medicare? And given all the actual, indisputable lies out there, how on earth could saying that it is be the “Lie of the year”? The answer is, of course, obvious: the people at Politifact are terrified of being considered partisan if they acknowledge the clear fact that there’s a lot more lying on one side of the political divide than on the other. So they’ve bent over backwards to appear “balanced” — and in the process made themselves useless and irrelevant.

Can We Afford Medicare? - The conventional wisdom, repeated endlessly by the so-called serious people, is that we can’t afford traditional Medicare and hence it has to be radically overhauled (see Ryan-Wyden for the latest round). But I’ve never seen a convincing argument for why we can’t afford traditional Medicare. Yes, costs are rising as a share of GDP. But in principle, to make the case that we have to reform the program, you would have to argue that revenues can’t rise enough to keep pace—which in most cases, just shows that you don’t want revenues to rise enough. More specifically, you have to know how big the Medicare deficit is and how fast it is rising. By my calculations, relying mainly on the 2011 Medicare Trustee’s report, the deficit was 1.7% of GDP in 2010 and will be 3.0% of GDP in 2040. So the argument that we can’t afford traditional Medicare relies on the proposition that this 1.3% of GDP is the straw that will break America’s fiscal back. Needless to say, this is nonsense, especially since other tax revenues not related to Medicare will be rising over the same time period, at least under current law. For all the details and sources, see my latest Atlantic column.

Hey, Washington: We Don't Have to Overhaul Medicare to Save It - Medicare needs a structural overhaul in order to avoid bankrupting the federal government--or so Republicans and many Democrats would have you believe. The latest evidence of this consensus is the Paul Ryan-Ron Wyden proposal to change Medicare into a voucher system where traditional Medicare is one of the options, but there are artificial caps on the value of the vouchers. There's only one problem with this consensus. It's wrong. The push for Medicare reform comes from understandable concerns about health care. Rising medical costs are a serious problem. We spend more than people in other countries, we get less, our gains in life expectancy are mediocre, employers are struggling with increasing health care costs, and of course, 50 million people are uninsured. Second, rising health care costs are the most important factor in the federal government's long-term deficit. The CBO projects that spending on Medicare, Medicaid, CHIP, and subsidies for insurance purchased through exchanges will grow from 5.4 percent of GDP this year to 10.3 percent in 2035, and that's assuming a slight slowdown in the growth rate of health care spending. (But there's a major caveat to that well-known talking point, discussed below.) Third, policies that actually reduce the overall, economy-wide price level for health care--for example, by shifting toward payment methods that focus on outcomes and promote accountability--are good. We should do all of that that we can.

More on Long-Term Care Insurance - After my previous post on the topic, a friend passed along a recent paper by Jeffrey Brown and Amy Finkelstein in the Journal of Economic Perspectives. I recommend reading it if you are interested in the topic because it provides a lot of good background information and explains some of why the market is the way it is. They make some similar points to mine. For example (p. 138): “First, the organization and delivery of long-term care is likely to change over the decades, so it is uncertain whether the policy bought today will cover what the consumer wants out of the choices available in 40 years. Second, why start paying premiums now when there is some chance that by the time long-term care is needed in several decades, the public sector may have substantially expanded its insurance coverage? A third concern is about counterparty risk.  In turn, potential buyers of such insurance may be discouraged by the risk of future premium increases and/or insurance company insolvency.” They also show just how expensive private long-term care insurance is. By their calculations, the load on a typical policy is 32% (which means that the present value of benefits is only 68% of the present value of premium costs).  This is what you would expect in a thin market with a lot of adverse selection. (And one more note: The median cost of long-term care is a lot lower than in Massachusetts, the state I cited in my previous post. See this study to see where your state ranks.)

Why Medicare is expensive, in one chart - We’re another day closer to the end of the year, but not much closer to agreement on a payroll tax bill. And that means, for health policy world, no agreement on a “doc-fix” to avert a 27.4 percent cut to Medicare doctors’ reimbursements.  A new article in New England Journal of Medicine probes how we got to this situation in the first place: Why are Medicare costs growing faster than Congress predicted they would back in the late 1990s? What created the gap between how much we budget for Medicare and how much we spend on the program? It mostly comes down to a handful of medical specialities that have grown much faster than expected. Some parts of the Medicare system have actually grown slower than expected. All of them, however, would face a double-digit cut in reimbursements if Congress doesn’t appropriate any additional money to the Medicare program.

Obama Admin Gives Up Pretense of Competitive Market for ACA Health Insurance Exchanges - The notion that the health insurance exchanges required by the Affordable Care Act would reduce health care costs using “competition” between concentrated health insurers was always one or more unbridgeable chasms away from a plausible theory. But the myths of competitive markets are so deeply ingrained in our political discourse it was inevitable that a nominal Democratic President not constrained by conceptual coherence and a corrupt Congress would try to sell us the conceit as the only politically feasible model for health care reform.  The economists — not to mention international experience — told us it was gibberish, but nobody cared. Now, however, the Obama Administration has given up even the pretense of a competitive model for the state-administered private insurance exchanges.  From Saturday’s New York Times (i.e, a Friday night news dump): In a major surprise on the politically charged new health care law, the Obama administration said Friday that it would not define a single uniform set of “essential health benefits” that must be provided by insurers for tens of millions of Americans. Instead, it will allow each state to specify the benefits within broad categories.

Drug shortages hit an all-time high - Between 2006 and 2010, drug shortages increased by more than 200%, according to a Government Accountability Office report released Thursday. There were a record 196 shortages last year, and even more are expected in 2012. “These shortages often force Americans to go without treatment,”  Renee Mosier is one of those patients who has been forced to forgo treatment and look for alternatives. The 61-year-old was first diagnosed in 2006 with ovarian cancer. After several successful surgeries and chemotherapy treatments, the cancer came back this past June. Her doctor suggested a chemo regimen that included Doxil, one of the most successful drugs to help keep ovarian cancer at bay. The only problem? Doxil wasn’t available. It is one of the drugs on the drug shortage list, and has not been available for several months. On average, the GAO report found that most shortages last more than 9 months. For Mosier, it’s not just about waiting for the drug. “It’s a life and death thing,” she says.

FDA Escalates War Against Amish Dairy Farmers - The U.S. Food and Drug Administration’s (FDA) apparent war on Amish raw dairy farmers increased on December 6 when they filed a “motion for summary judgment,” with Pennsylvania judge Lawrence Stengler asking for a permanent injunction against dairy farmer Dan Allgyer to forbid him from selling fresh milk out of state. FDA regulation 21 CFR §1240.61 criminalizes any selling of milk intended to cross state lines. After a two year expensive, exhaustive undercover operation, including multiple armed raids on Allgyer’s farm, FDA agents and a team of ten federal lawyers amassed over two hundred and seventy-six pages of evidence allegedly proving what Allgyer openly admits, that he is selling fresh (raw, unpasteurized) milk to customers who knowingly carry the milk across state lines. Thousands of Maryland customers who have been buying from Allgyer for years were the main focus for evidence during the investigation. In spite of the FDA raids and injunction filing, Allgyer has continued to support his customers’ needs for fresh milk and other farm foods, citing his God-given inalienable rights.

USDA Deregulates Two Monsanto Genetically Engineered Seeds - The United States Department of Agriculture (USDA) announced on Thursday its decision to deregulate two Monsanto genetically engineered (GE) seed varieties: a corn variety engineered to resist drought conditions and an herbicide-resistant soybean engineered to produce more fatty acids than regular soybeans.

Genetically Modified Mosquitoes to be Released in the US for the First Time - To those of you who have been eager to hear the latest news concerning the potential release of genetically modified mosquitoes - here it is. It turns out that the genetically modified mosquitoes could be released into the U.S. environment as early as January of 2012. A private firm plans to initiate the release of the GE mosquitoes in the Florida Keys. Florida will be the first beta testing grounds to determine whether or not the mosquitoes lead to detrimental environmental and genetic impact. Residents in this area will also be subjected - without choice - to these genetically manipulated insects, unless the private firm decides to seek permission

Toxic botulism in animals linked to RoundUp - Dr Mercola recently interviewed Dr Don Huber, whose letter to the USDA warning that Monsanto’s RoundUp, a broad-spectrum “herbicide” that has been linked with spontaneous abortion in animals, continues to be ignored by food and environmental safety authorities. In this important hour-long discussion, Huber, a plant pathologist for over 50 years, explains how RoundUp is destroying our healthy soils by killing needed microorganisms.Not only did his team discover a new soil pathogen, but he reports that animals are coming down with over 40 new diseases, like toxic botulism. Huber explains that before the widespread use of herbicides, pesticides and genetically modified food and feed, natural probiota would have kept Clostridium botulinum in check.  Mercola provided a full transcript and highlights some of the main points (excerpted):

Is the Environment Poisoning Our Children? - Seven years later, the Environmental Protection Agency released its final risk assessment for children who regularly contact wood impregnated with chromated copper arsenate. The conclusion: children who play frequently on pressure-treated play sets and decks (we had one of those, too) experience, over their lifetimes, elevated cancer risks. Ergo, our precautionary decision as parents to disenroll our daughter had been a wise one. And yet, because the EPA stopped short of recalling pre-existing play structures and decks when it outlawed arsenic-treated lumber for residential use in 2004, the old play structure at our old nursery school still stands.   ARSENIC, AS IT TURNS OUT, is not only a carcinogen but a developmental neurotoxicant as well — one of a family of substances that impair the growth of the brain in ways that interfere with learning. They take many forms, according to a major review of the evidence published in 2006 in the British medical journal The Lancet. Some of them are heavy metals, such as lead and methylmercury. Some are long-outlawed compounds that still linger among us (PCBs). One common one is used to strip paint, turn crude oil into gasoline, extract natural gas from shale, and suspend pigment in some nail polishes (toluene). Another two hundred chemicals are known to act as neurological poisons in human adults and are likely toxic to the developing brains of infants and children as well — animal studies strongly suggest that any neurotoxic chemical is likely also a neurodevelopmental toxicant —but scientific confirmation awaits.

New EPA mercury rules are a bona fide Big Deal - Wednesday, at long last, the EPA unveiled its new rule covering mercury and other toxic emissions from coal- and oil-fired power plants. It's worth lifting our heads out of the news cycle and taking a moment to appreciate that history is being made. Finally controlling mercury and toxics will be an advance on par with getting lead out of gasoline. It will save save tens of thousands of lives every year and prevent birth defects, learning disabilities, and respiratory diseases. It will make America a more decent, just, and humane place to live. A couple of background facts to contextualize what the new rule means:

  • First, remember that the original Clean Air Act "grandfathered" in dozens of existing coal plants back in 1977, on the assumption that they were nearing the end of their lives and would be shut soon anyway. Well, funny story ... they never shut down! There are still dozens of coal plants in the U.S. that don't meet the pollution standards in the original 1970 Clean Air Act, much less the 1990 amendments.
  • Second, mercury rules get directly at these plants in a way no other rules have. There's no trading system for mercury like there is for SO2 (the Bush administration tried to set one up, but the court struck it down). There are no short-cuts either. Every plant that's out of compliance has to install the "maximum available control technology."
  • Third, this has been a long time coming. (Nicholas Bianco has some good history here.) An assessment of mercury was part of the Clean Air Act amendments of 1990. EPA stalled and stalled, got sued, and finally did the assessment. Sure enough, as had been known for years, they found mercury is harmful to public health. been a fight for enviros every step of the way.

The Meaning of Mercury - Krugman - David Roberts reports on the EPA’s decision, finally, to regulate mercury from coal plants: Anyone who pays attention to green news will have spent the last two years hearing a torrent of stories about EPA rules and the political fights over them.  But this one is a Big Deal. It’s worth lifting our heads out of the news cycle and taking a moment to appreciate that history is being made. Finally controlling mercury and toxics will be an advance on par with getting lead out of gasoline. It will save save tens of thousands of lives every year and prevent birth defects, learning disabilities, and respiratory diseases. It will make America a more decent, just, and humane place to live. Let me repeat part of that: it will save tens of thousands of lives every year and prevent birth defects, learning disabilities, and respiratory diseases. This is actually a much bigger issue, when it comes to saving American lives, than terrorism. As Roberts explains, we’ve known about these costs of mercury pollution for decades, yet it took until now to get something done. The reason is, of course, obvious: special interests, hiding behind claims of immense economic damage if anything was done, were able to block action.

VIDEOs: President Obama and CAP’s Carol Browner on Final Approval of Mercury and Air Toxics Rule - Today, as EPA Administrator Lisa Jackson announced the final reduction requirements for mercury and other toxics from power plants, Carol Browner released the following statement: President Barack Obama adopted public health safeguards today that will drastically reduce dangerous emissions of mercury, arsenic, acid gases, and other pollutants from coal-fired power plants. The new safeguards are preventative medicine—they will annually forestall thousands of premature deaths, hospitalizations, and respiratory ailments. In less than three years, President Obama has reduced harmful air pollution from two major sources: power plants and vehicles. Cleaning up toxic and cross-state air pollution from dirty power plants will save 45,000 lives every year, or prevent nearly five deaths every hour. And modernizing vehicle fuel economy standards will slash carbon dioxide pollution and reduce oil use by more than 2 million barrels per day.

Growth of large private water companies brings higher water rates, little recourse for consumers - When Robert White opened his water bill last month, his jaw dropped: $250 for a month's worth of water and sewer service.  White's water service is provided by a private utility owned by California-based SouthWest Water Co. LLC. Just across the four-lane Pflugerville Parkway, where White's neighbors in the Springbrook Glen subdivision  get their water from Pflugerville, rates are on average about 60 percent less.  And White's bill for water service may nearly double soon, if SouthWest Water gets the latest rate increase it has requested. "I have never felt so helpless," he said.  He's not alone. Across the state, a growing number of suburban Texans are getting their water from large, private corporations owned by investors seeking to profit off the sale of an essential resource. State figures show private companies are seeking more price increases every year, and many are substantial.  The Texas Commission on Environmental Quality, which regulates water and sewer rates for nonmunicipal customers, doesn't keep numbers, but "their rate increases tend to be 40 and 60 percent," said Doug Holcomb, who oversees the agency's water utilities division.

Reactive nitrogen has polluted remote wilderness since the end of the 19th century - Nitrogen from human activity has been polluting lakes in the northern hemisphere since the late 19th century. The clear signs of industrialisation can be found even in very remote lakes, thousands of kilometres from the nearest city. This is shown in new research findings published today, Friday, in the journal Science. The research is based on studies of sediment from 36 lakes in the USA, Canada, Greenland and Svalbard, Norway. The researchers have analysed how the chemical composition of the sediment has changed over the centuries. Twenty-five of the lakes all show the same sign – that biologically active nitrogen from human sources can be traced back to the end of the 19th century. The nitrogen analyses of the lake sediments show that the changes began around 1895. The results also show that the rate of change has accelerated over the past 60 years, which is in agreement with the commercialisation of artificial fertiliser production in the 1950s. Sofia Holmgren, a researcher in Quaternary Geology at Lund University, Sweden, is the only Swede to take part in the comprehensive study. “I have studied lakes on Svalbard, where the effects of the increased nitrogen deposition are clearly visible in the algal flora”,

'Nature's Banker' on Proper Environment Valuation  - A few months ago Pavan Sukhdev delivered a very interesting talk at the LSE concerning 'The Economics of Ecosystems and Diversity' that brought home the point for me that resource finitude and non-renewability violate economic logic. That is, the dismal science of allocating scarce resources did not, on a global level, consider this question to the extent that it should. I subsequently got in touch with Pavan Sukhdev concerning some aspect of his G8-commissioned project since it seemed very fascinating to me. It now turns out that our good man has garnered more of the spotlight as of late. Just today, I received a holiday greeting from him that mentioned how he had recently appeared at the TED conference. Although I am not the biggest fan of the TED shindig, it is nonetheless a good way for him to reach a larger audience with his important message. What is the value of nature? Can you put a dollar value on the Amazon rainforests' environmental services? How about bee pollination? These are the sorts of questions we need to look at more according to him, and I am in total agreement.

India's rice production to dip 6.7% by 2020 - India's rice production is expected to drop 6.7% by 2020 due to the impact of climatic change, according to a study by the Indian Council of Agricultural Research (ICAR). The fall in rice production is expedcted to be around 15.1% and 28.2 % in 2050 and 2080, respectively. According to Harish Rawat, Minister of State for Agriculture, said in a written reply to Parliament , the climate change is likely to reduce cereal yields and more over the kharif rice is more vulnerable to climate change than Maize and sorghum, reported Press Trust of India (PTI). Meanwhile, as per the study, the diary production in the country is also said to be affected by the rising global warming, the milk production in the country could be reduced by 1.6 million tons by 2020 and more than 15 million tons by 2050.

What Happened to the WTO’s Original Food Security Agenda? - The WTO ministerial meeting in Geneva last week failed to take any decisions on the question of food security. Indeed, we knew this would be the outcome even before the meeting began. As the ICTSD reported, two proposals on food security – both calling for exemptions from export restrictions for the world’s least developed and net food importing developing countries and for humanitarian food purchases by the World Food Programme – did not gain sufficient support at the WTO General Council meeting in late November to make the Ministerial agenda. The fact that WTO members could not even support discussion of these specific measures does not bode well for the adoption of a broader and more comprehensive food security agenda at the WTO.  The disagreements over rules on export restrictions have in fact served as a distraction from the broader food security issues that the WTO is already supposed to be working on.The original Doha Agenda included negotiations on sweeping reforms to the 1994 Agreement on Agriculture, in particular to give special and differential treatment to developing countries, with a view to promoting food security. This was clearly spelled out in the agricultural work program of the Doha Declaration back in 2001 when the trade round was launched.

The anti-ethanol uprising  - For the uninitiated, weekend do-it-yourselfers and recreational boaters and snowmobilers, measure their “life comfort level” by the number of things in their garages (or barns) that have gas-fired cylinders.  A Cylinder Index of 25 or greater represents a huge achievement not to mention a high degree of satisfaction with one’s station in life. Total: 26 So just imagine the frustration when one goes with pride into their garage and tallies up his or her “Cylinder Index’” If it comes close to the above, one has surely arrived at a heavenly state — they are at peace with themselves, their family and neighbors. However, in recent years these folks are at peace with no one. They are raving mad. Their small engines will not start — they’ve been completely gummed up, clogged, because the gasoline they had placed in their small engines has been laced with 10 percent ethanol — a corn-based refined product. When a mixture of gasoline, laced with ethanol sits for a while in a small engine the ethanol decomposes and turns into water and guck. And it is a known fact that most small engine owners do not use their equipment on a daily basis — therefore the decomposing process is well at work.

Drought has killed up to 10 percent of Texas woodland trees - The unforgiving Texas drought has killed 100 million to 500 million trees statewide, according to a preliminary survey by the Texas Forest Service.  The devastation is equivalent to 2 to 10 percent of the estimated 4.9 billion trees on 63 million acres of woodlands in Texas, said Chris Edgar, a forest resource analyst. Land is considered forested if it has at least 10 percent coverage of tree canopy, he said. "We were surprised by the number," he said. "We were hearing reports, and as I drive around the state, I've seen mortality that in some cases is quite extensive. To see these numbers it really brings it home." And those figures don't include losses in urban areas or trees destroyed by wildfires that scorched nearly 4 million acres this year. "We don't have anything that we can compare to this mortality," Forest Service director Tom Boggus said. "This will probably set a benchmark."

Texas drought kills as many as half a billion trees – ‘This is a generational event’ - (Reuters) – The massive drought that has dried out Texas over the past year has killed as many as half a billion trees, according to new estimates from the Texas Forest Service. "In 2011, Texas experienced an exceptional drought, prolonged high winds, and record-setting temperatures," Forest Service Sustainable Forestry chief Burl Carraway told Reuters on Tuesday. "Together, those conditions took a severe toll on trees across the state." He said that between 100 million and 500 million trees were lost. That figure does not include trees killed in wildfires that have scorched an estimated 4 million acres in Texas since the beginning of 2011. A massive wildfire in Bastrop, east of Austin in September that destroyed 1,600 homes, is blamed for killing 1.5 million trees. The tree loss is in both urban and rural areas and represents as much as 10 percent of all the trees in the state, Carraway said. "This is a generational event," Barry Ward, executive director of the nonprofit Trees for Houston, which supports forestry efforts, told Reuters on Tuesday. "Mature trees take 20 or 30 years to re-grow. This will make an aesthetic difference for decades to come."

Latest Palmer Drought Severity Trends  - You may recall - and if not you may reread - that the Palmer Drought Severity Index is a 1960s era index constructed to try to use simple weather data - mainly temperature and precipitation - to decide if there is a drought or not.  This is more complex than it might appear at first thought since - for example - a given precipitation deficit means something completely different in the winter (when temperatures are low and there is little evaporation) than in the summer.  And a given deficit in precipitation minus evaporation will mean something completely different if the soil starts out saturated than if it is already dried out. The PDSI makes use of a simple two-bucket model of how much water is in the soil and how it changes in response to temperature and moisture and then uses various normalization procedures to compare the resulting estimated soil moisture to what is normal for that particular climate.  The final result is a scale which in principle runs from -10 to 10, but in which below -4 is a very severe drought and above +4 is an extremely wet period. This index has been in use for decades in the US, long before global warming was on the radar of all but a tiny handful of scientists.  However, it's quite possible to take the values for temperature and precipitation out of global climate model runs and put them into the PDSI formula, and when that is done, the unpleasant prediction is one of widespread, rapidly-worsening-to-catastrophic levels of drought in the twenty-first century.

Year of Misfortune: Top 12 Billion-Dollar U.S. Disasters (Bloomberg slideshow) Historic U.S. weather catastrophes took an unprecedented toll in human lives and livelihood in 2011. At least 12 natural disasters wreaked more than $1 billion in damage apiece, according to the U.S. National Climate Data Center. When all the lost crops have been tallied, insurance claims filed and ravaged assets accounted for, the number is likely to be 14, with a total cost of more than $50 billion. The previous high was eight, in 2008. The frequency of mass weather calamities has been increasing since 1970, based on records going back to 1910. It's a trend that's "virtually certain" to continue, according to a recent United Nations report by a panel of dozens of scientists. Rising global temperatures put more water vapor in the air, intensifying storms. Climate change also exacerbates the impact of drought, heat waves and wildfires.

Our Extreme Weather: Is Arctic Sea Ice Loss to blame? - “The question is not whether sea ice loss is affecting the large-scale atmospheric circulation…. It’s how can it not?” That was the take-home message from Dr. Jennifer Francis of Rutgers University, in her talk “Does Arctic Amplification Fuel Extreme Weather in Mid-Latitudes?”, presented at last week’s American Geophysical Union meeting in San Francisco. Dr. Francis presented new research in review for publication, which shows that Arctic sea ice loss may significantly affect the upper-level atmospheric circulation, slowing its winds and increasing its tendency to make contorted high-amplitude loops. High-amplitude loops in the upper level wind pattern (and associated jet stream) increases the probability of persistent weather patterns in the Northern Hemisphere, potentially leading to extreme weather due to longer-duration cold spells, snow events, heat waves, flooding events, and drought conditions.

Jeff Masters: The Arctic Oscillation and its influence on winter weather - The Arctic Oscillation (AO), and its close cousin, the North Atlantic Oscillation (NAO), are climate patterns in the Northern Hemisphere defined by fluctuations in the difference of sea-level pressure between the Icelandic Low and the Azores High. Through east-west oscillation motions of the Icelandic Low and the Azores High, the AO and NAO control the strength and direction of westerly winds and storm tracks across the North Atlantic. A large difference in the pressure between Iceland and the Azores (positive AO/NAO) leads to increased westerly winds and mild winter in the U.S. and Western Europe. Positive AO/NAO conditions also cause the Icelandic Low to draw a stronger south-westerly flow of air over eastern North America, preventing Arctic air from plunging southward.  In contrast, if the difference in sea-level pressure between Iceland and the Azores is small (negative AO/NAO), westerly winds are suppressed, allowing Arctic air to spill southwards into eastern North America more readily. Negative AO/NAO winters tend to bring cold winters to Europe and the U.S. East Coast, but leads to very warm conditions in the Arctic, since all the cold air spilling out of the Arctic gets replaced by warm air flowing poleward. The winter of 2009-2010 had the most extreme negative NAO and AO since record keeping began in 1865; a very extreme AO/NAO also developed during the winter of 2010-2011. But this year, the pattern has flipped. The AO has been almost as strong, but in the opposite sense -- a positive AO, leading to very warm conditions over the U.S.

Greenland Ice Sheet Surface Melting, 2000-2011 - NASA Video - In the past decade or so, the annual seasonal thaw on Greenland has grown more dramatic. This animation shows visible melting along the western edge of the Greenland Ice Sheet near the Jakobshavn Glacier each August between 2000 and 2011. Except for the edges, Greenland is buried in ice year round. Each winter, snowfall covers even the margin, leaving the entire island white. Each summer, the snow melts, exposing the rocky coastline, where glaciers pour out to sea through narrow fjords. In the past decade or so, the seasonal thaw has grown more dramatic. Meltwater runs in streams that plunge deep into the ice. Between June and August, these streams fill ice-dammed lakes that collapse under their own weight and pour water into the sea. This animation shows visible melting along the western edge of the Greenland Ice Sheet near the Jakobshavn Glacier (bottom left) each August between 2000 and 2011. Where the seasonal snow cover has melted completely at lower elevations near the coast, the ice looks gray. The dirty appearance is partly due to the fact that the bare ice is not as reflective as snow, but it also due to dust and debris layered on and embedded in the ice.

Permafrost thaw: ‘A chronic source of emissions that will last hundreds of years’ – A bubble rose through a hole in the surface of a frozen lake. It popped, followed by another, and another, as if a pot were somehow boiling in the icy depths.  Every bursting bubble sent up a puff of methane, a powerful greenhouse gas generated beneath the lake from the decay of plant debris. These plants last saw the light of day 30,000 years ago and have been locked in a deep freeze — until now.  Experts have long known that northern lands were a storehouse of frozen carbon, locked up in the form of leaves, roots and other organic matter trapped in icy soil — a mix that, when thawed, can produce methane and carbon dioxide, gases that trap heat and warm the planet. But they have been stunned in recent years to realize just how much organic debris is there. A recent estimate suggests that the perennially frozen ground known as permafrost, which underlies nearly a quarter of the Northern Hemisphere, contains twice as much carbon as the entire atmosphere.

400ppm in 2015 - If you thought that global carbon emissions were increasing linearly over time (roughly true) and that a constant fraction of them were retained in the atmosphere each year (also roughly true) then you would expect that the atmospheric concentration of CO2 would increase quadratically.  A quadratic fit to the annual Mauna Loa data is above and you can see that this simple brain-dead model explains 99.91% of the variation in the data from 1958 to 2010.  Not often you see an R2 of 99.91%.  If you were willing to assume that the coupled system of planet/civilization were to continue to behave in the same way for a few more years, then we'll hit 400ppm in 2015. If you are willing to extrapolate a few decades (admittedly a sketchier assumption) it looks like we'll be in the mid 430s by 2030:

What’s Changed on Climate Change - Matt Yglesias writes Back in 2008 both Barack Obama and Hillary Clinton and John McCain and Mitt Romney all seemed to agree, in principle, that it ought to be a high priority to enact some kind of binding limit on American greenhouse gas emissions. Even given that, the path to a binding workable global agreement was clearly frought with peril since there’s a divergence of perspectives between newcomers to the high emissions party (China) and those who’ve been there a long time (United States). But in the intervening three years, the politics of this have been totally transformed in a way that’s not even slightly backed up by the scientific information that’s come in over this time. Instead of debating whether or not emissions will be limited or reduced, we’re debating the Keystone XL pipeline as a kind of proxy war over fossil fuels. What’s changed is whether or not the debate matters. To back up a bit more, in 2006 it would have been easy to suggest that – look its probably impossible to alter the general trend line on global emissions but there is some damage associated with carbon and so it makes sense to tax carbon rather than to tax things we like such as work and savings.

Brazil’s forest policy could undermine its climate goals - Brazil, caretaker of the world’s largest rain forest, is about to enact broad new regulations that opponents say could loosen restrictions on Amazon deforestation and increase the country’s greenhouse gas emissions. The move comes after two years of often roiling debates and dozens of hearings across the country over how to update a 1965 law that was designed to control slash-and-burn agriculture. Backers say the proposed Forest Code bill, which is expected to be signed into law early next year, would protect the Amazon while easing the regulatory burden on small farmers. Brazil, a leader on climate change and host of next June’s U.N. Earth Summit in Rio de Janeiro, is charting a climate strategy shaped by domestic politics and economic concerns that sometimes appears at odds with its international environmental rhetoric. Such domestic pressures — clear also in increasingly influential developing countries such as China and India — have created uncertainty over how the world will curb its carbon output by the end of the decade, even as negotiators gear up to forge a new global warming pact by 2015.

Environmentalists Get Down to Earth - AT a fall retreat, board members of the Natural Resources Defense Council, the environmental advocacy group, listened as a political consultant gave a critique of the green movement.  Think of the public as a consumer in a grocery aisle passing a box of brownie mix, the consultant said. The brownie on the front is so delectable that she can imagine the taste and the smell. So delicious, in fact, that she pays no attention to the back of the box listing the ruinous fat and calorie content.  Environmentalists, the consultant said, were always yammering to consumers about the back of the box.  And, guess what? Nobody wants to listen.  If there was a tougher moment over the last 40 years to be a leader in the American environmental movement, it would be hard to put your finger on it. The earth is warming, perhaps catastrophically, yet legislative efforts to cap carbon emissions collapsed in 2010. Global carbon limits have been equally elusive, as a conference in Durban, South Africa, showed again last week.

Direct action is 'the only real solution' to environmental problems - Our generation of ecological writers, scientists, and activists confront a situation without historical analog. 21st Century naturalists and environmentalists genuinely concerned about enjoying and preserving wilderness are forced to accept the harsh realities that what little remains of untouched nature is increasingly subjected to seemingly unstoppable destructive forces. The magnitude of the situation is difficult to accept and understand. The perceptive abilities of the human mind and collective consciousness are thrust into a surreal and uncertain future. Even industrial society’s cornerstones of technological progress and institutionalized science have proven insufficient. Especially since the dramatic “big melt” of arctic ice in 2007, scientists have been forced to admit their models and predictions of climate change have been grossly understated.  I had the opportunity to discuss the role of radical writing in the age of environmental collapse with author and friend Cara Hoffman ( Hoffman’s critically acclaimed novel So Much Pretty, named best suspense novel of 2011 by the New York Times Book Review, takes on issues of environmental collapse in rural America. Prior to becoming a novelist Hoffman worked as an environmental reporter for newspapers in upstate New York and was a professor of composition and rhetoric. She additionally contributed to Guerrilla News Network and The Fifth Estate.

Europe’s Energy Companies Call for Higher Carbon Prices - Some of Europe’s biggest energy and manufacturing companies have called for a strengthening of the EU Emissions Trading Scheme (ETS), in the wake of the release of the European Commission’s energy roadmap and ahead of a key vote on the EU Energy Efficiency Directive (EED). Companies including oil and gas giant Shell and Danish utility DONG Energy wrote to the European Commission stating they fear for the future of the EU ETS because of record-low carbon prices of €6-7 ($7.80-9.20) seen this month. “I think that if we could at lest get the price back up to the €20-range we’d be doing a lot better,” Sandrine Dixson Declève, director of The Prince of Wales's EU Corporate Leaders Group on Climate Change, told Environmental Finance. The companies back the EED, but “call upon European institutions and member state governments to ensure that the EED or future policy measures are aligned with the ETS”, as increased energy efficiency measures might mean carbon prices will fall further.

Industry: Light bulb war a dim idea - Big Business usually loves it when the GOP goes to war over federal rules. But not when it comes to light bulbs. This year, House Republicans made it a top priority to roll back regulations they say are too costly for business. Last week, the GOP won a long-fought battle to kill new energy efficiency rules for bulbs when House and Senate negotiators included a rider to block enforcement of the regulations in the $1 trillion-plus, year-end spending bill. The rider may have advanced GOP talking points about light bulb “freedom of choice,” but it didn’t win them many friends in the industry, who are more interested in their bottom line than political rhetoric. Big companies like General Electric, Philips and Osram Sylvania spent big bucks preparing for the standards, and the industry is fuming over the GOP bid to undercut them. After spending four years and millions of dollars prepping for the new rules, businesses say pulling the plug now could cost them. The National Electrical Manufacturers Association has waged a lobbying campaign for more than a year to persuade the GOP to abandon the effort.

Despite Congressional Reprieve, The Old Incandescent Light Bulb Is Still Dead - As James Joyner noted on Friday, the Republicans scored a minor victory on Friday when the final Fiscal Year 2011 budget bill ended up including a rider that barred the Energy Department from spending money to enforce the regulations on light bulb energy efficiency set to go into effect in January. It turns out, though, that the industry is already on track to phase out the old-style incandescent bulb regardless of what the House GOP might want to do; Despite all the heated rhetoric and political brinksmanship, the delay hardly matters. The looming possibility of the new standards, signed into law by President Bush in 2007 — and the fact that places like Europe, Australia, Brazil and China have already put similar measures in place or intend to do so — has transformed the industry. A host of more efficient products already line store shelves and poke out of light sockets. “Bottom line, the standards are moving forward unabated,” said Noah Horowitz, a senior scientist at the Natural Resources Defense Council, which has promoted the standards. Calling the delay in enforcement a “speed bump,” he added, “Incandescent light bulbs are not going away due to the standard, they are just getting better. The new ones that meet the standard will use 28 percent less power and look and perform exactly like the old one.”

Bill Gates Funds 'Big Battery' Startup - One of the great underappreciated issues of renewable energy isn't whether seagulls are banging into turbine blades. It's whether intermittent sources of power have any real value in a world without energy storage. But that won't be as big an issue if a new battery technology finds its way to the market. The battery, developed by a startup called Liquid Metal Battery Corp. (LMBC), could serve as a form of storage for everything from electric utilities down to single-family homes and virtually everything in between. Moreover, it has significant investors behind it, including Bill Gates. Sadoway's idea is to build "a honkin' big battery" -- a unit as large as 1,000 cubic feet that uses hundreds of cells, each the size of a pizza box. The battery's advantages are that it is cheap, can be made big, and offers high energy density. Ultimately, the company believes such a battery could fill the storage role if it drops its cost to $100/kWh, but Sadoway and the company's executives are not saying what their battery costs today.

How Will California Achieve its 33% RPS Goal? - Today, California's electricity is mainly generated using natural gas.  By the year 2020, AB32 legislation requires that 33% of the state's power come from renewables such as wind and solar.  This is the renewable portfolio standard (RPS).  For years, I have wondered what will be the cost of achieving this ambitious goal.  In recent days, the CEC has released documents from a recent conference on the RPS.  As usual, I see lots of talented engineers presenting stuff but unless I'm mistaken I don't see any economic analysis.  Is that puzzling?  Why should economists be involved?   I would think that economists could model the likely impact on electricity pricing from substituting to renewables.  I would think that residential, industrial and commercial consumers will care about such a prediction.  In terms of formal economics, what does the state's supply curve for power look like?  How binding a constraint is the 33% RPS?  In english, what would be the price per kWh if we continue to use natural gas as the energy source versus what would the price be under the 33% RPS?  For an optimistic opinion on this issue read this. From an economic science point of view, this big green push offers an excellent test of the "learning by doing" hypothesis.  Does the average cost per kWh of renewable power decline with more cumulative production?  As the industry matures, is there more investment in renewables?

A Solar Trade War Could Put Us All in the Dark - After decades of global competition and collaboration, many solar markets around the world have reached grid parity—the point at which generating solar electricity, without subsidies, costs less than the electricity purchased from the grid. In other words, solar technology is ready to be a major contributor to solving our planet’s energy and environmental crisis. However, trade protectionism threatens to inhibit the solar industry at the very time when it is breaking through to a new level of global interdependence, collaboration, and maturity. On October 18, the U.S. government was asked to impose tariffs on imports of Chinese solar cells and modules, based on the argument that China-based producers have been heavily subsidized and are selling solar products at unfairly low prices. Perhaps not surprisingly, some Chinese companies have now asked the Chinese government to impose tariffs on imports of American solar products, arguing that U.S.-based producers have been heavily subsidized, too. And just like that, the production of affordable and competitive solar products has become a political liability in the world’s two largest producers and consumers of energy.

How much dam energy can we get? - Having now sorted solar, wind, and tidal power into three “boxes,” let’s keep going and investigate another source of non-fossil energy and put it in a box. Today we’ll look at hydroelectricity. As one of the earliest renewable energy resources to be exploited, hydroelectricity is the low-hanging fruit of the renewable world. It’s steady, self-storing, highly efficient, cost-effective, low-carbon, low-tech, and offers a serious boon to water skiers. I’m sold! Let’s have more of that! How much might we expect to get from hydro, and how important will its role be compared to other renewable resources? The “potent” label—formerly “useful”— is meant to indicate a source that could supply a healthy fraction (say over a quarter) of our global demand if fully exploited. We will never fully exploit any resource, so the numbers at least need to support ¼-scale before we can believe that it may play a major role. I should also point out that all along, my approach is to pretend that our goal is to keep up our current energy standards in a post-fossil-fuel world. In the process, we will see just how hard that will be to do. It is by no means impossible, but it’s much more difficult and compromised than most people realize. In the end, it is not clear that we will maintain our current global rate of energy usage: the future is unwritten.

Groundwater with 23,000 pCi/liter of radioactive material found around Tennessee nuke plant — Exceeds limit for drinking water - Radioactive material discovered in water around Sequoyah, WRCB/AP, Dec. 20, 2011: Tennessee Valley Authority officials have reported finding elevated levels of tritium in a groundwater sample taken from one of two new onsite monitoring wells at the Sequoyah Nuclear Plant. [...] The highest level found in the sampling on Friday, December 16, was approximately 23,000 picocuries per liter. [...] The number and severity of the leaks has been escalating, even as federal regulators extend the licenses of more and more reactors across the nation. [...] Sequoyah Nuclear Reports Tritium Levels Exceeding 20k pCi/L in offsite groundwater, Enformable, Dec, 20, 2011: The tritium levels were confirmed to be greater than 20,000 pCi/L which is the threshold for drinking water. No groundwater monitoring wells are used for drinking or irrigation purposes onsite.

14,000 US Deaths Tied to Fukushima Reactor Disaster Fallout: Medical Journal Article - An estimated 14,000 excess deaths in the United States are linked to the radioactive fallout from the disaster at the Fukushima nuclear reactors in Japan, according to a major new article in the December 2011 edition of the International Journal of Health Services. This is the first peer-reviewed study published in a medical journal documenting the health hazards of Fukushima. Authors Joseph Mangano and Janette Sherman note that their estimate of 14,000 excess U.S. deaths in the 14 weeks after the Fukushima meltdowns is comparable to the 16,500 excess deaths in the 17 weeks after the Chernobyl meltdown in 1986.The rise in reported deaths after Fukushima was largest among U.S. infants under age one.  The 2010-2011 increase for infant deaths in the spring was 1.8 percent, compared to a decrease of 8.37 percent in the preceding 14 weeks.

14,000 U.S. Deaths Tied to Fukushima Reactor Disaster Fallout, Says Peer-Reviewed Medical Journal Article - And that's during the 14 weeks right after the Fukushima I Nuke Plant accident that is "over" now. rom a PR Newswire press release that appeared on MarketWatch/Wall Street Journal (12/19/2011): An estimated 14,000 excess deaths in the United States are linked to the radioactive fallout from the disaster at the Fukushima nuclear reactors in Japan, according to a major new article in the December 2011 edition of the International Journal of Health Services. This is the first peer-reviewed study published in a medical journal documenting the health hazards of Fukushima. Authors Joseph Mangano and Janette Sherman note that their estimate of 14,000 excess U.S. deaths in the 14 weeks after the Fukushima meltdowns is comparable to the 16,500 excess deaths in the 17 weeks after the Chernobyl meltdown in 1986. The rise in reported deaths after Fukushima was largest among U.S. infants under age one.

Japan Says Decommissioning Damaged Reactors Could Take 40 Years - Decommissioning the wrecked reactors at the Fukushima Daiichi nuclear plant will take 40 years and require the use of robots to remove melted fuel that appears to be stuck to the bottom of the reactors’ containment vessels, the Japanese government said on Wednesday. The predictions were contained in a detailed roadmap for fully shutting down the three reactors, which suffered meltdowns after an earthquake and tsunami struck the plant on March 11. The government had previously predicted it would take 30 years to clean up after the accident at Fukushima, the world’s worst nuclear disaster since Chernobyl in 1986.  The nuclear crisis minister, Goshi Hosono, acknowledged that no country has ever had to clean up three destroyed reactors at the same time. Mr. Hosono told reporters the decommissioning faced challenges that were not totally predictable, but “we must do it even though we may face difficulties along the way.”  The plan’s release follows last week’s declaration by Prime Minister Yoshihiko Noda that the plant had been put into the equivalent of a “cold shutdown,” a stable state that suggested the runaway reactors had finally been brought under control. Critics, however, immediately challenged that statement, saying it was impossible to call the reactors stable when their fuel had melted through the inner containment vessels, and appeared to be attached to the concrete bottom of outer containment vessels.

Critical Mass - More than nine months after the nuclear-reactor disaster at Fukushima, fundamental questions about what happened remain unanswered. Without answers to these questions, Japan, and the rest of the world, is in the dark on what went wrong, what must be done now, and how to avoid similar accidents in future.  Following the accident, the Tokyo Electric Power Company, which operated the Fukushima plant, initially released only a heavily redacted nuclear-reactor manual. When finally released in an undoctored format in late October, the manual revealed just how lacking the company was in terms of contingency measures. This concealment gives some idea of why even senior political figures struggled for answers in the wake of the disaster, and why they have now chosen to pose their questions in this very public way.This all points to a problem in Japan that predates Fukushima and seems to afflict every Japanese regime: the absence of a strong and independent scientific voice to advise the government. In this case, such a voice — be it from a chief scientist appointed by the government or from a truly independent nuclear regulator — could have helped to direct evacuations, medical relief, screening for radiation and decontamination efforts. It also would have helped to lead the studies needed to find answers to the questions mentioned above.

Ohio set to see oil boom thanks to fracking - Ohio hasn't been an oil powerhouse for nearly 100 years. But thanks to controversial new drilling technology, the state that once produced a third of the nation's crude and was the birthplace of John D. Rockefeller's mighty Standard Oil could once again be a significant source of domestic supply. Hydraulic fracturing, known as fracking for short, involves injecting water, sand and chemicals deep into the ground at high pressure to crack the shale and allow the oil or gas to flow.  The process, combined with horizontal drilling, has unleashed an energy boom in the United States but also raised fears of ground water contamination, earthquakes and other worries.  As production in Ohio ramps up the state finds itself at a critical juncture -- coming up with the right mix of regulations that allows this oil to be tapped, yet avoids the contamination that has occurred in states where fracking is more widespread. If given the proper development, Ohio could be producing 200,000 barrels of crude a day by 2020.

Driller pays South Butler School District $628,000 for rights - Drilling company Phillips Exploration Inc. has signed an oil and gas lease with South Butler School District and paid the district an up-front fee of more than a half-million dollars. District officials, however, caution that, even though money and signatures have been exchanged, they have no idea whether drilling will become a reality. "Really, at this point, they haven't indicated yes or no whether that will happen ... or a time frame or anything," said district spokesman Jason Davidek. The school board approved the five-year lease in a 6-2 vote in September. After that, Phillips had 90 days to review that lease, do a title search, check the document's provisions and sign it. Among the provisions in the lease: • The district must OK any site the company wants to drill. • No well will be drilled and no pipeline will come closer than 500 feet to a district structure. • "Pooling" is allowed, meaning Phillips could station a wellhead on another property adjacent to South Butler's but still extract the district's gas reserves. As an up-front payment, Phillips paid the district about $628,000, which will be deposited in the general fund for now. There are two payment portions to the lease, Davidek said: The up-front payment and a royalty of 18 percent of the proceeds received if gas is extracted.

Abundance of Shale Gas Could Drive the US Manufacturing Industry to New Heights -- "The abundance of shale gas resources may spark a U.S. manufacturing renaissance with economic benefits that include cost savings, greater investments to expand U.S. manufacturing facilities and increased levels of employment, according to a new report released last Friday by PwC titled, “Shale Gas: A renaissance in US manufacturing?” To achieve these results, however, PwC says that manufacturers must help manage the environmental, regulatory and tax concerns created by shale gas resources. “An underappreciated part of the shale gas story is the substantial cost benefits that could become available to manufacturers based upon estimates of future natural gas prices as more shale gas is recovered,” said Bob McCutcheon, U.S. industrial products leader, PwC. He continued, “In fact, the number of U.S. chemicals, metals and industrial manufacturing companies that disclosed shale gas potential and its impact so far in 2011 easily surpassed that of the last three years combined, indicating this is of growing importance in the outlook of U.S. manufacturers. The significant uptick in shale gas commentary among the manufacturing community reflects the positive influence that shale gas is having from investment, operational and demand standpoints.”

Earthquakes, Water Pollution and Increased Greenhouse Gas Emissions? Fracking - Strike Number Three? -- The last decade has seen a sustained campaign by the hydraulic fracturing (‘fracking”) industry against its critics, as the fracking industry in the U.S. alone was worth an estimated $76 billion in 2010 and is projected to grow to $231 billion in 2036 if only those pesky environmentalists can be sidelined.  While U.S. energy companies began fracking for gas in the late 1990s, there was a dramatic increase in 2005 after the administration of President  George W. Bush exempted fracking from regulations under the U.S. Clean Water Act. According to Washington’s energy Information Agency, shale gas production has grown 48 percent annually. But there still some snakes to be chased from the industry’s campaign to convince the electorate that natgas produced by fracking is safe, as on 8 December the Environmental Protection Agency said for the first time it found chemicals used in fracking in a drinking-water aquifer in west-central Wyoming.  Even worse, a report released the following month by the U.S. National Center for Atmospheric Research noted that switching from coal to natural gas as an energy source could result in increased global warming, mainly due to the methane leakage problem, which is common but unregulated.

Top 10 Creative Videos of 2011: My Water’s On Fire Tonight (The Fracking Song) The best thing about fracking, perhaps, is that it sounds like a swear word. The worst thing? That is a long list. Luckily, a creative team of students at Studio 20 NYU made a music video explaining ProPublica’s (let’s face it) rather dry three-year investigation on the controversial natural-gas drilling technique. With a chorus like, “What the frack is going on with all this fracking going on?”, the talented animators and composers behind “My Water’s On Fire Tonight (The Fracking Song)” make a tune about energy regulation a hip-shaking experience.

PwC: Shale Gas Will Generate Billions Of Dollars Of Savings And Create Over A Million Jobs: Shale energy is a hot topic lately. But discussion of this brand of fossil fuel is as unwelcome at the family dinner table as religion and politics due to its controversial nature. A new study published by PricewaterhouseCooper titled Shale Gas: A Renaissance In US Manufacturing provides new ammunition for those who are pro shale. According to the study, full-scale development of shale gas through 2025 would generate a staggering $11.6 billion in annualized cost savings by reducing natural gas expenses. Image: PwC Furthermore, the industry would create over 1.1 million jobs over that period. You can read the complete results of the study here.

Does shale oil boom mean U.S. energy independence near? — Ever since Richard Nixon's 1973 promise to attain energy independence, successive U.S. presidents all have pledged the same goal, even as foreign supplies composed a larger and larger share of the U.S. energy mix.  Now, almost 40 years later, a measure of independence is within reach. But as this booming mountain town in northeastern Pennsylvania shows, the quest for independence involves both opportunities and trade-offs. It may surprise Americans who've lived through many years of dependence on foreign fuels, but in less than a decade the United States could pass its 1970s peak as an oil and natural gas producer. If that happens — and many analysts think it's possible — the United States would edge past Saudi Arabia and Russia to become the world's top energy producer.  That alone wouldn't make us completely energy independent. Mexico and Canada are likely to remain stable providers of oil to supplement growing U.S. production. However, the biggest potential game changer for U.S. energy production is natural gas, which previously had been supplied largely from the Gulf of Mexico region. Just a few years ago, terminals were being built at U.S. ports in anticipation of importing natural gas; today, there's talk of exporting it.

Did the Federal Government Invent the Shale Gas Boom? - In the Washington Post the folks at the Breakthrough Institute try to learn us some history about the shale gas boom. Maybe you think the shale gas boom was some big surprise suddenly made real after the decades-long work of a hard-headed oil and gas guy – George Mitchell – willing to spend millions of dollars on the crazy idea that hydrocarbons stuck in a rock could be produced economically, once the right mix of technologies could be brought to bear. Wrong, says the Breakthrough Institute, credit the shale gas boom to the federal government. They have their reasons:

  • “Slick-water fracking, the technology that Mitchell used to crack the shale gas code, was adapted from massive hydraulic fracturing, a technology first demonstrated by the Energy Department in 1977.”
  • “Mitchell learned of shale’s potential from the Eastern Gas Shales Project, a partnership begun in 1976 between the Energy Department’s Morgantown Energy Research Center and dozens of companies and universities ….”
  • “Mitchell’s success depended on a revolution in monitoring and mapping technologies driven largely by government labs.”

A boom in shale gas? Credit the feds - Since the high-profile bankruptcy of Solyndra, the solar company that received $535 million in federal loan guarantees, many have concluded that government efforts to promote energy technologies are doomed to fail. Critics cite the abandoned synthetic fuels program, attempts to capture carbon pollution from coal plants and next-generation nuclear reactors as further proof of this conclusion. Many often point to the shale gas revolution as evidence that the private sector, in response to market forces, is better than government bureaucrats at picking technological winners. It’s a compelling story, one that pits inventive entrepreneurs against slow-moving technocrats and self-dealing politicians. The problem is, it isn’t true. While details vary, the story is basically the same for nuclear power, natural gas turbines, solar panels, and wind turbines — pretty much every significant energy technology since World War II. That’s because the private sector alone cannot sustain the kind of long-term investments necessary for big technological breakthroughs in the midst of volatile energy markets and short-term pressure to produce profits. No doubt, government energy innovation investments could be made more efficiently and effectively. But it would be a mistake to imagine that we’d be better off without them.

D’oh! Oil industry lobbyists punked by enviro activist (AUDIO) The oil industry spends millions each year to shape its image and shift the public debate in its favor. But amid growing concern over climate change -- and over the industry's clout in Washington -- it can sometimes find itself losing control of its message pretty quickly. That's what happened earlier this month, when the American Petroleum Institute (API), a powerful Washington-based lobbying organization for oil and gas companies, put out a call for volunteers to appear in an upcoming commercial about domestic energy production -- and got more than it bargained for. The ad campaign, scheduled to launch January 1 on CNN and coordinated by the high-priced Edelman PR firm, uses ordinary-looking people, dubbed "Energy Citizens," to insert a pro-oil and gas message into the 2012 elections. But one respondent to the casting call, Connor Gibson, turned out not to be quite what the industry was looking for. Unbeknownst to the organizers, Gibson was an activist with the environmental group Greenpeace, and was surreptitiously recording the proceedings -- recordings that Greenpeace provided exclusively to Yahoo News.

Boehner Blasts Obama On Keystone XL, Despite White House Acceptance Of Deal - Obama economic adviser Gene Sperling defended Sunday the president's decision not to veto a congressional deal to extend the payroll tax cut and the delivery of unemployment benefits by two months, despite the inclusion of a provision forcing Obama to make a decision on the Keystone XL pipeline. Obama had vowed to veto any bill that required the Keystone XL pipeline to be approved; Sperling noted Sunday on CNN's "State of the Union" program that the deal only requires Obama to make a decision on the pipeline's permit within 60 days -- not to actually implement the pipeline. "The president did make clear that he was not going to allow congress to tie to that vote something that would mandate or force him to accept the keystone permit when there was not adequate time to do a health and safety environmental review," Sperling said. "Because nothing in this bill mandates the president to do that, this ... whether wise or not, did not go against his veto threat."  Appearing on NBC's "Meet the Press," House Speaker John Boehner (R-Ohio) seized on the administration's past support for the pipeline, and said that if the administration had wanted an environmental review, they should have conducted one at some point during the past three years that the pipeline has been under consideration. "That's nonsense, they've had three years," Boehner said. "This was about to be approved last summer, so waiting and waiting and waiting is not the answer. It's time to proceed with the pipeline." Boehner said the president is "just kicking the can down the road because it may anger some people in his base."

Costs and benefits of the Keystone XL pipeline - With new pressure on the Obama Administration to approve the Keystone Gulf Coast Expansion Pipeline, I thought it would be helpful to review some of the debate. One issue that received a good deal of attention was the possibility that oil would spill from the new pipeline and contaminate water supplies in Nebraska and elsewhere. Let me begin with the report from the U.S. State Department: Keystone has agreed to incorporate the 57 Project-specific Special Conditions developed by PMSA [the Pipeline and Hazardous Materials Safety Administration] into the proposed Project.... In consultation with PHMSA, DOS determined that incorporation of the Special Conditions would result in a Project that would have a degree of safety greater than any typically constructed domestic oil pipeline system under current regulations and a degree of safety along the entire length of the pipeline system that would be similar to that required in high consequence areas as defined in the regulations.... DOS calculated that there could be from 1.18 to 1.83 spills greater than 2,100 gallons per year for the entire Project.  Although small spills will still occur, pipelines are by far the most efficient way to transport petroleum, and we could hardly do without them.

Breaking: House GOP Cave on Tax Cut Extension Paves Way for Obama to Deny Keystone XL Permit  - House Speaker John Boehner conceded to the inevitable and agreed to approve the Senate compromise that extends the payroll tax cut and unemployment insurance two months. That bill also includes, at the GOP’s insistence, a requirement that Obama make a decision within 60 days on the tar sands pipeline, which is likely fatal to Keystone XL (see “GOP Threaten to Harm the Economy If Obama Won’t Embrace Tar Sands Pipeline“).  Jeremy Symons of National Wildlife Federation has the latest, including quotes from Bill McKibben of, Jane Kleeb of Bold Nebraska: So what does this mean for the pipeline?  Speaker Boehner is trying to satisfy Big Oil’s lobbyists and some of the GOP’s top corporate donors by forcing the president to make a hasty decision, but it will backfire.   I am confident that President Obama will stand up to big oil and reject this dangerous and unnecessary pipeline because it is the right thing to do, and that the American public will support him.

Linking Keystone XL to the Payroll Tax Only Shows Why we Need a Real Energy Policy - The administration is coming under increasing pressure to accelerate approval of the Keystone XL pipeline, designed to carry increased U.S. imports of bitumen from Canadian oil sands. The latest form of pressure is a Senate bill that would fast-track KXL in exchange for a two-month extension of the payroll tax cut and other items. After some resistance, it now appears the House will go along with the proposal. It is a bad idea. The new legislation proposes a trade-off of short-term economic stimulus for fast-tracking a long-term project that is vehemently opposed by environmentalists. Part of the problem is that so little is being offered. Short-term tax cuts are among the least effective forms of fiscal policy. Has everyone forgotten the Bush administration’s one-shot tax rebate in the spring of 2008? It shot one big hole in the budget, reducing future fiscal room for maneuver, but it created only the most transient of boosts to economic activity. On top of that, social security itself is in need of long-term restructuring. Undermining its funding in the name of short-term stimulus just doesn’t make sense. The obsession with short-term issues is not a partisan problem, nor is it confined to Congress.  The White House is also seems to be looking only at the short-term issues.

In Internal Canadian Documents, a Warning on Oil Sands - Internal government documents show that Canada’s scientific and environmental bureaucracy does not share the Conservative government’s view that oil sands projects in Alberta have relatively little negative impact on the environment. Postmedia News, a publisher that owns several major Canadian newspapers including The National Post in Toronto, obtained the previously confidential material through Canada’s access-to-information laws. Peter Kent, the environment minister, and Prime Minister Stephen Harper have said that oil sands projects are being unfairly attacked by environmental groups that are exaggerating their effects. But in a a PowerPoint presentation, Environment Canada, the federal environmental agency, said that contamination of the Athabasca River, which flows north from the oils sands, is “a high-profile concern” and that that there are “questions about possible effects on health of wildlife and downstream communities.”The presentation also noted that the increase in greenhouse gas emissions related to the oil sands would equal the increase in emissions from all other sources in Canada by 2020. And it raised concerns about other forms of air pollution from the projects.

Shell spills 13,000 gallons while drilling near Deepwater Horizon site - Shell International spilled 13,000 gallons of oil and drilling fluids into the Gulf on Sunday while drilling an exploratory well near the site of last year’s Deepwater Horizon accident, according to a federal report on the spill. The area where the well was being drilled is about 20 miles from the site of the BP oil spill. Shell is working in water more than 7,000 feet deep. The well was being drilled by the Deepwater Nautilus, according to federal records. That rig is owned and operated by Transocean, the company that owned the Deepwater Horizon rig. While a report Shell filed Monday morning with the National Response Center states that the company spilled 7,560 gallons of oil and 5,829 gallons of synthetic drilling fluids, company spokesperson Kelly op de Weegh said late Monday afternoon that no oil was spilled.

A Closer Look At The Staggering Ecological Cost Of Russia's Oil Industry - On the bright yellow tundra outside this oil town near the Arctic Circle, a pitch-black pool of crude stretches toward the horizon. The source: a decommissioned well whose rusty screws ooze with oil, viscous like jam. This is the face of Russia's oil country, a sprawling, inhospitable zone that experts say represents the world's worst ecological oil catastrophe. Environmentalists estimate at least 1 percent of Russia's annual oil production, or 5 million tons, is spilled every year. That is equivalent to one Deepwater Horizon-scale leak about every two months. Crumbling infrastructure and a harsh climate combine to spell disaster in the world's largest oil producer, responsible for 13 percent of global output. Oil, stubbornly seeping through rusty pipelines and old wells, contaminates soil, kills all plants that grow on it and destroys habitats for mammals and birds. Half a million tons every year get into rivers that flow into the Arctic Ocean, the government says, upsetting the delicate environmental balance in those waters. It's part of a legacy of environmental tragedy that has plagued Russia and the countries of its former Soviet empire for decades, from the nuclear horrors of Chernobyl in Ukraine to lethal chemical waste in the Russian city of Dzerzhinsk and paper mill pollution seeping into Siberia's Lake Baikal, which holds one-fifth of the world's supply of fresh water.

The Massacre Everyone Ignored: Up To 70 Striking Oil Workers Killed In Kazakhstan By US-Supported Dictator - With violence and government crackdowns making headlines from so many familiar parts of the world, there’s hardly been a peep in the media about the biggest and ugliest massacre of all: Last Friday in Kazakhstan, riot police slaughtered up 70 striking oil workers, wounding somewhere between 500 and 800, and arresting scores. Almost as soon as the massacre went down in the western regional city of Zhanaozen, the Kazakh authorities cut off access to twitter and cell phone coverage–effectively cutting the region off from the rest of the world, relegating the massacre into the small news wire print. But not before someone was able to get a video out to YouTube last Friday, showing the moment when the striking oil workers–who have put up with inhuman, medieval abuse for months now, culminating with the murders a few months back of a striking oil worker and the 18-year-old-daughter of another union organizer, as well as the jailing of a labor lawyer working with the striking oil workers. Keep in mind, the oil company whose workers are striking for better pay and union recognition, KazMunaiGaz, is “owned” by the billionaire son-in-law of Kazakhstan’s Western-backed president-for-life. Among Kazakhstan’s leading American partners are Chevron, whose website boasts, “Chevron is Kazakhstan’s largest private oil producer”–adding this bit of unintentional black humor: “In Kazakhstan, as in any country where Chevron does business, we are a strong supporter of programs that help the community.”

Oil and democracy: New insights - Looking at the historical experiences of many countries it seems uncontroversial that an abundance of natural resources can shape political outcomes. Few observers of Venezuela, Nigeria, Saudi Arabia, and many other resource-rich countries would take seriously the proposition that political developments in these countries can be understood without reference – indeed without attributing a central role -- to these countries' natural wealth. Oil and other natural resources can be both a blessing and a curse. Incomes may rise, but the politics can soon turn nasty. This column looks at a large panel of countries and finds that this isn’t always the case. Discovering natural resources has no effect on the political system – if the country is already a democracy.

Brazil's oil problem -- Corruption, grandstanding and total incompetence may sink Brazil's dreams of becoming an oil exporting powerhouse. Prosecutors in the country last week slapped Chevron and drilling partner Transocean with an $11 billion fine for accidentally releasing around 3,000 barrels of oil off of Brazil's coast. While the fine is clearly excessive and unlikely to stick, it has raised questions regarding the long-term safety of doing business in Brazil. Oil spills seem to unfortunately be a fact of life when drilling and transporting oil from the ocean floor. Massive spills, like BP's disastrous four-million barrel belch in the Gulf of Mexico last year, though, are totally unacceptable. But the leaking of a few hundred barrels of oil per year seems to be par for the course when extracting millions. In Brazil, though, one would think that such minute spills were a capital offense -- especially if the offender was a foreign oil company. US-based Chevron (CVX) was fined 50 million reals ($28 million) by Brazil's federal government earlier this month for leaking around 2,400 to 3,000 barrels from one of its offshore drilling platforms located 75-miles off the coast of Brazil's iconic beaches in Rio de Janeiro.

Aramco ups rig numbers - Saudi Aramco plans to raise the number of drilling rigs it operates to pre-crisis levels of at least 130 by the second quarter of 2012 as it strives to maintain production capacity levels, Reuters reported.  The state-run company Aramco had seen a sharp decline in rig count from 130 to 104 after the global economic crisis hit demand in 2009.  Half of the addition will be for Manifa, an industry source unidentified by Reuters told the newswire, as Aramco expedited plans to bring the 900,000 barrels per day oilfield on line by 2014.  "The plan is to increase rigs by the second quarter, whether they make it or not is a different story," said a source, adding the plan is to have 135 rigs in operation.  Industry sources had expected Aramco to keep the level of rigs it operates little changed from 2010 but following disruptions to Libya's output earlier this year Saudi Arabia increased output.

Kazakh Oil Production - The above shows Kazakh oil production (red, left scale) and the ratio of Kazakh proved oil reserves to annual production (blue, right scale).  Why do we care all of a sudden, you ask?  Well: About 50 people fought police on Saturday in the town of Shetpe, 60 miles north of Zhanaozen, where fighting first broke out. A train, cars and shops were all set alight before armed police were able to regain control. A statement from Kazakhstan’s Prosecutor-General on Sunday suggested that police shot at the protesters. At least 12 people have now died in fighting in western Kazakhstan which started in the town of Zhanaoz en on Friday when sacked oil workers fought police in the main square. Independent sources, though, have said that the death toll is higher. Steve LeVine suggests thinking of the events in relationship to the Arab Spring... Thus I wanted to look up the basic facts of Kazakh oil production: Note that the level of production is about 1.8mbd in 2010 - a little larger than pre-crisis Libya (1.6mbd).  Production has been growing rapidly for a decade.  Also worthy of note is the very high R/P ratio of over 60.  For comparison, the R/P in the United States for the last forty years has fluctuated between 8 and 12.  Thus Kazakhstan could continue to expand production several-fold before reaching the level of maturity and depletion in the US basins.

Nigeria on alert as Shell announces worst oil spill in a decade - Nigerian coastal and fishing communities were on Thursday put on alert after Shell admitted to an oil spill that is likely to be the worst in the area for a decade, according to government officials.. The company said up to 40,000 barrels of crude oil was spilled on Wednesday while it was transferred from a floating oil platform to a tanker 75 miles off the coast of the Niger delta. All production from the Bonga field, which produces around 200,000 barrels a day, was last night suspended. "Early indications show that less than 40,000 barrels of oil have leaked in total. Spill response procedures have been initiated and emergency control and spill risk procedures are up and running," said Tony Okonedo, a Shell Nigeria spokesman. Satellite pictures obtained by independent monitors Skytruth suggested that the spill was 70km-long and was spread over 923 square kilometers (356 sq miles). But a leading Nigerian human rights group said Shell's figures about the quantity of oil spilled or the clean-up could not be relied on. "Shell says 40,000 barrels were spilled and production was shut but we do not trust them because past incidents show that the company consistently under-reports the amounts and impacts of its carelessness," said Nnimmo Bassey, head of Environmental Rights Action, based in Lagos.

The Great Disruption - Growth as we’ve known it is over, Paul Gilding and Richard Heinberg told a Climate One audience in San Francisco on November 7. Confronted by resource constraints and crippling debt, nations must instead focus on growth that respects nature’s limits. “The idea that we can keep on growing the economy up against the physical limits of the Earth” – water, oil, and land – “is not physically possible,” said Paul Gilding, Professor, University of Cambridge Program for Sustainability Leadership, and author, The Great Disruption.  “We’re in a trap really. If we grow the economy, then we’ll hit those limits again. Prices will go up. Oil prices will go up. Food prices will go up. And the economy will go down,” he said. “If we don’t grow the economy, we’re going to drown in debt. We’re going to take a while to find our way out of this morass that we’ve dug ourselves into.” Richard Heinberg, Senior Fellow, Post Carbon Institute, and author, The End of Growth, has written that it took decades for nominal GDP to recover after the Great Depression. But the fallout of the Great Recession, he said, will be much worse. “I don’t think we’ll ever see growth the way we experienced during the decades of the 20th century. If we’re thinking of growth in terms of increased consumption, then I think it’s all over.”

A Severe Decrease in Oil Supply Could Devastate the World Population - It is interesting that it is scientists from the former U.S.S.R. who throng among the ranks of "Hubbert detractors" - those who do not believe in an imminent "peak oil" scenario. There appears to be a conflict of opinion, and probably of interest too, between Western and Soviet oil experts, which revolves around different viewpoints as to the origin of petroleum. The western belief is, as we were all taught at school, that petroleum is a result of "cooking" plant and animal remains over millennia, and proof of its origin thus is taken to be the presence of the same type of organic molecules (porphyrins etc.) as are found in living plants and animals, i.e. the biotic theory. Soviet thinking, which goes back at least as far as the great Russian chemist Mendeleyev (who devised the Periodic Table of the chemical Elements), is that petroleum is formed in the deep earth by geochemical processes - Mendeleyev thought by the action of water on iron carbides. This is called the abiotic theory. Either the Russians will secure their position more strongly in the new world order, or affordable oil will run out - for everybody. This is particularly alarming in the context of world population. In 1900, there were less than 2 billion people on the planet (up from about 1 billion in 1800); now the figure has just passed 7 billion, and the exponential curve in population growth that these numbers can be plotted upon is an exact parallel with the curve for oil production.

Unplugging Our Economic Ponzi Scheme - In 1977, the editors of MOTHER EARTH NEWS published a sprawl­ing Economic Outlook that pre­sented a number of bold, disturbing as­sertions that emphasized our need for a new economic model:

• Capitalism, as we know it, is designed to exploit newly discovered resources and will flounder when we run out of new frontiers to conquer.
• The human population continues to grow rapidly.
• We can recognize and pre­dict coming shortages of oil, irrigation water and arable land.
• The health of our current world economy is con­tingent upon continued population growth and the discovery of new natu­ral resources.
• We need new economic systems to support a “steady state” econo­my — an economy of stable size with only mild fluctuations in population and consumption of en­ergy and materials.

To support their thesis, the editors quoted historian Walter Prescott Webb, whose 1951 book The Great Frontier warned that when we run out of natural resources, our economic systems will stop working.

The news is terrible. Is the world really doomed? -It is a crisp bright winter morning, but in a windowless basement gallery at Tate Britain, minutes after opening time, there is already quite a crowd for the paintings of the end of the world. The 19th-century artist John Martin has an erratic reputation, the exhibition has been running for months, and entry is a not-very-recession-compatible £14. But his grandiose panoramas of churning floods and cities aflame are being eagerly studied by today's ticketholders. Caoilfhionn Ní Bheacháin is one of them. She is a youngish lecturer in communications at the University of Limerick in Ireland, on holiday in London; as an employee of both the public sector and academia, she understands that the future may not be too cheery for Ireland, Britain and the rest of the western world. Apocalypse is the title of the show. "The work is of the moment," she says, a little professorially, as we talk in the gift shop. "The sense of imminent doom, the scenes of cities being destroyed – it goes with the recent riots, with what's happening to the planet's ecology." Above us on the wall is an exhibition poster: a detail from Martin's best-known picture, a hellish vortex of crashing rocks and collapsing sky, like a cross between a heavy metal album cover and Hieronymus Bosch, called The Great Day of His Wrath. "I also quite love the gothic," she says with a smile. "I'm thinking of getting one for my office."

Peak Oil? Not According to This Chart -This week we’re tackling the pesky little debate about Peak Oil and America’s overreliance on oil imports. Near the height of the energy crisis in 2008, the Republicans popularized the slogan, “Drill, baby, drill!” But they should have been chanting, “Frac, baby, frac!” Why? Because the largest gains in domestic oil production are coming from hydraulic fracturing. And this is most evident in North Dakota and Montana, which are home to the Bakken Shale. A 2008 study by the U.S. Geological Survey estimates there’s as much as 4.3 billion barrels of recoverable oil in the formation. And North Dakota’s not wasting any time tapping it. In September, North Dakota pumped a record 464,129 barrels a day – a 439% increase from a decade ago and right on par with Ecuador’s production. The gushing isn’t done yet, though. Within five years, Rick Mueller, of ESAI Energy LLC, predicts that North Dakota could be producing anywhere from 700,000 barrels to one million barrels a day. Doesn’t sound like a Peak Oil situation to me. Does it to you?

Why Oil Prices Are Killing the Economy - Have rising oil prices just put the final coffin nail in the entire 2009-2011 economic recovery? Given the slowdown in China, the new recession in Europe, and the rocky bottom in the US economy, it certainly seems that way.  Oil prices emerged from their spider hole over two and half years ago. Having fallen from the towering heights of $148 a barrel in the summer of 2008, the early months of 2009 saw a return to prices in the $30s. Interestingly, during that great oil crash, the price of West Texas Intermediate Crude Oil (WTIC) spent only 20 trading sessions below $40. That is the exact price that most analysts only three years prior believed oil could never sustain as the world would pump “like crazy” should prices ever reach such “impossibly high levels.” Given the enormous debt troubles the West is currently facing and the fact that oil has averaged over $100 during several months this year, it does seem reasonable to suggest that, once again, the economy has been pushed off a ledge by oil. Let’s take a look at oil prices over the past several years.

Trends in Indian Petroleum Production, Consumption and Imports - In this post, I summarize my export land model analysis of India using the published petroleum production and consumption data from the BP Statistical Review for 2011. India's rate of petroleum consumption for the last thirty years has been exponentially increasing and out-striping Indian's domestic production which is in a flat-to-declining trend. In 2010, India imported 75% of its petroleum, mostly from the MENA countries. This trend, of increasing dependence on foreign petroleum imports, is likely to continue, at least until the global export pool declines. My approach to data analysis is the same as what I have done in the past in my multi-part global regional survey. In that survey, India was part of, the numbers for the Asia-Pacific region, and like China, I regret not having separated out India from the rest of the Asia-Pacific in that analysis..

India’s Coal Shortages to Worsen as Coal India Reduces Production Target - State-controlled Coal India Limited (CIL) announced that it has lowered its production target for the fiscal year to 440 million metric tons, down from the 452 million tons initially outlined in the company’s annual plan, according to an Economic Times article  Indian news agency PTI has quoted CIL Chairman N.C. Jha as confirming that they have kept the production target of at least 440 million tons, the chairman cited various reasons such as heavy rainfall, strikes and delays in obtaining forestry and environmental clearances for coal projects as the causes of the productions target’s downward revision. Currently, CIL’s production is 10 percent below target, with a decrease of 3.9 percent as compared to the last year’s output. The coal miner was not able to achieve its April-September target by about 20 million metric tons, recording an output of 176 million tons against the target of 196 million tons, as inclement weather, including heavy rains in August- September that affected production in almost all its collieries. CIL accounts for 81 percent of India’s domestic coal production and is the sole supplier of coal and other basic raw materials to state-owned power utilities across the country. It has already missed the target in 2010-11 with the production barely inching up 0.2 percent over a year before, touching 431 million metric tons.

Rising coal costs to hit India power projects, says Fitch - The rising cost of imported coal, coupled with a weakening rupee, could force some Indian power projects to default on their debt obligations, ratings agency Fitch said on Tuesday. Fitch estimated that the average cost of generation could rise to 4.41 rupees (8 cents) per kilowatt hour for projects relying entirely on imported coal, from the current average of 2.29 rupees, if current trends continue.Coal accounts for 55 percent of India's power generation capacity of 182,344 megawatts. But while the country holds 10 percent of the world's coal reserves, power companies often struggle to access local supplies due to environmental and land acquisition delays, forcing expensive imports. The higher costs could put massive pressure on plants that cannot pass on higher fuel costs to customers, and in some cases this could render projects unviable, the ratings agency said.

China announces discovery of massive coal deposit - China has reportedly discovered an 89.2 billion tonne coal reserve at Sha'er Lake in northwest Xinjiang Uygur, in a find that is being termed the largest in Asia. The new find is expected to be slightly bigger than Inner Mongolia, currently China's largest coal producing region - it surpassed that of the Shanxi province to become the largest coal producing region last year with an annual output of 782 million tonnes. Coal output rose 26.6% year on year to 908 million tonnes in the first 11 months of the year. The output in November alone has been pegged at 94.1 million tonnes, up 18.1% year on year from the Inner Mongolia region. According to the provincial statistics bureau, Shanxi's coal output reached 790 million tonnes between January and November 2011, registering an annual increase of 18.6%. The November output rose 15.3% to hit a monthly record of 80.8 million tonnes. With estimates that coal reserves in Xinjiang hovered over 2 trillion tonnes, which is 40% of China's total coal reserves, the new coal find is expected to help the country meet its energy consumption needs. During the 12th Five Year Plan, China's energy consumption of standard coal is set to increase by 0.8 to 1 gigaton, with an average annual increase of 4.8% to 5.5%, according to a recent report of the China Energy Development 2011.

Interactive Graphic: China’s Explosive Consumption of Coal  - Want to see just how much coal consumption in Asia has grown in the last 30 years? These new animated info-graphics from the Energy Information Administration tell a powerful and scary story. As expected, much of the recent growth in Asia — particularly since 2003 — has come from China. That country’s use of coal has increased 500% since 1980, made up almost three quarters of Asian consumption, and half of global consumption last year.Clicking on the graphic below will re-direct you to the EIA’s website, where you can watch the animation.

Video: 30,000 Chinese ‘Occupy’ Highway to Protest Polluting Coal Plants - Tens of thousands of residents in China’s southern Guandong Province gathered in the streets yesterday, occupying a highway to demonstrate against the development of a new coal plant near Shantou city. The residents say existing coal plants in the area are fouling local air and water, and are making people sick. Each year, protests spring up to counter the construction of dirty coal plants. But this appears to be the biggest yet. Officials now say they will abandon plans to build a new coal plant in the area. Two people were reportedly killed in clashes with police, but the government is denying those reports. China’s coal use has exploded over the last few decades. Since 1980, coal consumption in China has grown 500%, and now represents three quarters of consumption in Asia. That has coincided with a five-fold increase of lung cancer since 1970, now the leading cause of death in China.

Hedge fund alarm bells are ringing over China - The eurozone’s political tarantella may still be roiling global markets but some of the world’s savviest investors are already turning their attention elsewhere.  It is not trips to Brussels or Frankfurt that analysts at large, secretive hedge funds are planning in the first few months of 2012, but data-gathering exercises in Shenzen and Guangzhou. The past few weeks have seen China loom large in the nightmares of many hedge fund managers still smarting from a less-than glory-filled 2011. Concerns are rising for the global outlook over the increasingly negative economic signals emanating from the country.  As the Emerging Sovereign Group, a $1bn hedge fund backed by Julian Robertson and half owned by Carlyle, one of the world’s biggest private equity groups, told its clients in a recent note: “[we have a] gathering sense that the next act of this rolling global debt crisis may well play out in the East.”

Foreign Affairs: China’s Real Estate Crash - For years analysts have warned of a looming real estate bubble in China, but the predicted downturn, the bursting of that bubble, never occurred — that is, until now. In a telling scene two months ago, Shanghai property developers started slashing prices on their latest luxury condos by up to one-third. Crowds of owners who had recently bought apartments at full price converged on sales offices throughout the city, demanding refunds. Some angry investors went on a rampage, breaking windows and smashing showrooms. Shanghai homeowners are hardly the only ones getting nervous. Sudden, steep price reductions are upending real estate markets across China. According to the property agency Homelink, new home prices in Beijing dropped 35 percent in November alone. And the free fall may continue for some time. Centaline, another leading property agency, estimates that developers have built up 22 months’ worth of unsold inventory in Beijing and 21 months’ worth in Shanghai. Everyone from local landowners to Chinese speculators and international investors are now worrying that these discounts indicate that “the biggest bubble of the century,” as it was called earlier this year, has just popped, with serious consequences not only for one of the world’s most promising economies — but internationally as well 

China Debts on Local Projects Dwarf Official Data - A copy of Manhattan, complete with Rockefeller and Lincoln centers and what passes for the Hudson River, is under construction an hour’s train ride from Beijing. And like New York City in the 1970s, it may need a bailout. Debt accumulated by companies financing local governments such as Tianjin, home to the New York lookalike project, is rising, a survey of Chinese-language bond prospectuses issued this year indicates. It also suggests the total owed by all such entities likely dwarfs the count by China’s national auditor and figures disclosed by banks. Bloomberg News tallied the debt disclosed by all 231 local government financing companies that sold bonds, notes or commercial paper through Dec. 10 this year. The total amounted to 3.96 trillion yuan ($622 billion), mostly in bank loans, more than the current size of the European bailout fund. There are 6,576 of such entities across China, according to a June count by the National Audit Office, which put their total debt at 4.97 trillion yuan. That means the 231 borrowers studied by Bloomberg have alone amassed more than three-quarters of the overall debt.

China governments in hole as land sales plummet ( Caixin Online ) — The development-ready land market, long a reliable revenue source for local governments across China, has suddenly turned cold. And city halls are shivering. Government-sponsored land auctions in cities nationwide have slowed dramatically in recent months, reflecting shrinking consumer demand and what one executive called a “winter mode” strategy among major developers. Nominal land values have fallen, and some auctions have been canceled due to a lack of bidders.  “The land market is basically deadlocked,” said Chen Xiaotian, president of China Real Estate Information Corp. (CIRC), a market research firm. The cool-down follows last year’s decision by the central government to rein in soaring home prices and dampen speculation with measures such as stricter mortgage terms for buyers of second and third homes, as well as restrictions on bank loans for developers.

Will China Break?, by Paul Krugman -  Consider the following picture: Recent growth has relied on a huge construction boom fueled by surging real estate prices, and exhibiting all the classic signs of a bubble. There was rapid growth in credit — with much of that growth taking place not through traditional banking but rather through unregulated “shadow banking” neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting — and there are real reasons to fear financial and economic crisis. I’ve been reluctant to weigh in on the Chinese situation, in part because it’s so hard to know what’s really happening. Still, even the official data are troubling — and recent news is sufficiently dramatic to ring alarm bells.  The most striking thing about the Chinese economy over the past decade was the way household consumption, although rising, lagged behind overall growth. At this point consumer spending is only about 35 percent of G.D.P., about half the level in the United States.  So who’s buying the goods and services China produces? Part of the answer is, well, we are: as the consumer share of the economy declined, China increasingly relied on trade surpluses to keep manufacturing afloat. But the bigger story from China’s point of view is investment spending, which has soared to almost half of G.D.P.

UN Data: China Is Now World's No. 1 Manufacturer, But It Requires 9-10 TImes As Many Workers As U.S. - According to new data just released by the United Nations, China surpassed the United States in 2010 to become the world's No. 1 manufacturing nation, ending America's dominance as the world's largest manufacturer since the late 1800s (see chart above of the top five manufacturing countries). China's manufacturing output in 2010 of $19.222 trillion and 18.89% share of world manufacturing output of $10,176 trillion,was slightly ahead of America's manufacturing output of $1.855 trillion and 18.24% share of global manufacturing production.   Before the mainstream media or others gets overly impressed with China's rise as a manufacturing superpower (e.g. Andy Stern in the WSJ praising China's "superior economic model"), they should proceed with caution for the following reason: China's manufacturing workforce is estimated to be around 100 million and could be as high as 120 million, compared to America's manufacturing employment of about 11.5 million.  Therefore, China is producing roughly the same manufacturing output as the U.S. but Chinese worker productivity is so low it needs 9-10 workers for every one American factory worker.     

Chart of the Day: International Manufacturing Compensation Costs Compared -- Great data from the BLS comparing hourly compensation for manufacturing. The second chart looks at the benefits component of the hourly cost. The data are from 2010 and sensitive to exchange rate movements. We will post a follow-up chart in the next few days looking at the 2009-10 change in hourly compensation, breaking out the changes in wage and benefits versus the FX component.

Japan Talking to China About Buying Yuan Government Bonds Japan is discussing with China possible purchases of Chinese government bonds, Finance Minister Jun Azumi said, a sign the nation is diversifying foreign- exchange holdings by tapping into the world’s second-largest economy. “I think it’s mutually beneficial” for the two countries to be investing in one another’s debt, Azumi said at a press conference in Tokyo today. “We’re not abandoning the dollar or euro, but we’re adding the yuan to deepen our relationship.”  China, which is also Japan’s largest trading partner, sold the second-biggest net amount of Japanese debt on record as the yen headed for a postwar high against the dollar and benchmark yields approached their lowest levels in a year. It cut Japanese debt by 853 billion yen ($11 billion) in October, Japan’s Ministry of Finance said on Dec. 8. China sold a net 2.02 trillion yen of Japanese debt in August 2010, a record based on data going back to January 2005.

Japan recovery paused as deficit grows - The Bank of Japan said Wednesday the country's economic recovery "has paused" because of the slowing global economy and strong yen, as data revealed a growing trade deficit for the export-dependent nation. The central bank left its key interest rate unchanged at between zero and 0.1 percent, but despite the crunch, did not offer any more easing. "The pick-up in Japan's economic activity has paused, mainly due to the effects of a slowdown in overseas economies and of the appreciation of the yen," the central bank said after a two-day policy meeting. "Improvement in business sentiment has slowed on the whole despite steady improvement in domestic demand-oriented sectors," the bank said in a statement. It warned the European financial crisis was posing a serious risk to the global outlook. "The sovereign debt problem in Europe could result in weaker growth not only in the European economy but also in the global economy, particularly through its effects on global financial markets," it said.

Japan Govt To Offer Pension Fund IOU To Get Round Bond Issuance Cap -Japan's government decided Thursday to effectively write a special Y2.6 trillion check for the nation's pension fund next fiscal year to temporarily meet its payment obligations, in a desperate attempt to hold down official public debt issuance. The highly unusual move is aimed at saving cash and satisfying a government promise to keep new bond issuance below a promised level of Y44.3 trillion in the main budget for the year starting April.

Wray: World Discovers MMT - Japan is the champion nation in terms of budget deficits and government debt relative to GDP. Many have long argued (wrongly) that this is because holders happen to have addresses in Japan. Nonsense. A sovereign government that issues its own currency makes interest payments on its debt in exactly the same manner whether the holder has an address at the South Pole or on Mars: a keystroke to a savings deposit at the central bank. What matters is whether the country issues its own currency. That is why the little spat between the UK and France—with France insisting that credit agencies ought to down-grade the UK before they downgrade France—is so silly. France can have a debt ratio under 15% of GDP and still be forced to default. The UK can have a debt ratio above Japan’s 200% and still face no chance of involuntary default. That is the beauty and utility of issuing your own currency. France is a currency user and its fate depends on Germany—which is busy sucking up every spare Euro it can lay its greedy hands on. France is no better off than the panhandler on the street corner begging for pocket change—a user of currency, not an issuer.

The Exchange-Rate Delusion - Spence - If one looks at the trade patterns of the global economy’s two biggest players, two facts leap out. One is that, while the United States runs a trade deficit with almost everyone, including Canada, Mexico, China, Germany, France, Japan, South Korea, and Taiwan, not to mention the oil-exporting countries, the largest deficit is with China. If trade data were re-calculated to reflect the country of origin of various components of value-added, the general picture would not change, but the relative magnitudes would: higher US deficits with Germany, South Korea, Taiwan, and Japan, and a dramatically lower deficit with China.  The second fact is that Japan, South Korea, and Taiwan – all relatively high-income economies – have a large trade surplus with China. Germany has relatively balanced trade with China, even recording a modest bilateral surplus in the post-crisis period. The US has a persistent overall trade deficit that fluctuates in the range of 3-6% of GDP. But, while the total reflects bilateral deficits with just about everyone, the US Congress is obsessed with China, and appears convinced that the primary cause of the problem lies in Chinese manipulation of the renminbi’s exchange rate. One problem with this view is that it cannot account for the stark differences between the US and Japan, Germany, and South Korea.

Are Persistent Trade Deficits a Bad Thing? - The Economist asks: Are persistent trade deficits a bad thing? Under what conditions are trade deficits benign, and under what conditions might they be a problem? My answer is rather text-bookish (I consulted Krugman and Obstfeld's International Economics text before answering): Persistent trade gaps leave economies vulnerable - Mark Thoma.  Other responses:

[All responses here.]

World Trade Partial Recovery in November - You may recall that last month I developed a methodology for seasonally adjusting the monthly world trade figures from the WTO.  Based on initial reports from only 20 of 70 countries for October, it seemed that world trade was dropping sharply in that month (seasonally adjusted).  At this point, all but a handful of countries have reported for October and that has confirmed the initial picture as essentially valid. However, being an impatient soul, I wanted to know what was happening in November.  So I repeated the exercise with the eleven(!) out of seventy countries that are all that are available at present (representing about a quarter of global trade).  Clearly this is slightly sketchier but again I rely on the fact that imports and exports are telling the same story - trade did not continue to fall in November, but instead made a partial recovery.  Overall then the current best picture is that world trade has basically gone flat in the second half of 2011 - we are currently below the May level so it's clearly not growing - but we cannot say with confidence that it is contracting at present.  The world economy is hanging in suspense, waiting to see how bad things will get in Europe.

America's Pacific Century - By Hillary Clinton  As the war in Iraq winds down and America begins to withdraw its forces from Afghanistan, the United States stands at a pivot point. Over the last 10 years, we have allocated immense resources to those two theaters. In the next 10 years, we need to be smart and systematic about where we invest time and energy, so that we put ourselves in the best position to sustain our leadership, secure our interests, and advance our values. One of the most important tasks of American statecraft over the next decade will therefore be to lock in a substantially increased investment -- diplomatic, economic, strategic, and otherwise -- in the Asia-Pacific region. The Asia-Pacific has become a key driver of global politics. Stretching from the Indian subcontinent to the western shores of the Americas, the region spans two oceans -- the Pacific and the Indian -- that are increasingly linked by shipping and strategy. It boasts almost half the world's population. It includes many of the key engines of the global economy, as well as the largest emitters of greenhouse gases. It is home to several of our key allies and important emerging powers like China, India, and Indonesia.

IMF warns that world risks sliding into a 1930s-style slump Business - The world risks sliding into a 1930s-style slump unless countries settle their differences and work together to tackle Europe's deepening debt crisis, the head of the International Monetary Fund has warned. On a day that saw an escalation in the tit-for-tat trade battle between China and the United States and a deepening of the diplomatic rift between Britain and France, Christine Lagarde issued her strongest warning yet about the health of the global economy and said if the international community failed to co-operate the risk was of "retraction, rising protectionism, isolation". She added: "This is exactly the description of what happened in the 1930s, and what followed is not something we are looking forward to." The IMF managing director's call came amid growing concern that 2012 will see Europe slide into a double-dip recession, with knock-on effects for the rest of the global economy. "The world economic outlook at the moment is not particularly rosy. It is quite gloomy," she said. Since arriving in Washington in the summer, Lagarde has been forced to cut her organisation's forecasts for global growth next year and is now putting pressure on countries outside the eurozone – including Britain – to play their part in containing Europe's sovereign debt crisis.

Thoughts on Europe and the global synchronised slowdown -Most eyes are focused on Europe where the German-led fiscal austerity union is not proceeding smoothly. I continue to be sanguine there in that I expect a late but robust policy response which will mean support for euro government bonds and the broader stock market over the short-term. Over the medium-term, despite easy money from the ECB, there are problems and I anticipate these to come to a head for the situation in Greece and for euro zone economic growth. In the medium-term, through 2012, I don’t expect euro zone failure. I do expect a worsening crisis as poor growth takes a toll. Over the longer-term, however, I am less sanguine. The euro cannot work as envisioned by the Germans. It will see at least Greece leave. The things that I think are actually most relevant over the short to medium term on markets are outside Europe.  Here are three events that should be on your radar screen:
Chinese housing bubble pops: Global Macro Monitor has run a few pieces on this of late. Now, in April I warned that overheating and an aggressive policy response could eventually lead to a hard landing.
Australia housing bubble popping: Moody’s has downgraded Australian mortgage insurers because of ‘tail’ risk in the Australian housing market.
Indian growth slowdown: Christopher Wood, a well-regarded market analysts at CLSA, an India bull recently cut his guidance for growth in India to 6% from 7%.

PIMCO: Euro Zone Debt Woes, China Slowdown to Damp 2012 - Global growth is likely to be capped in 2012 by Europe’s ongoing debt crisis and a slowdown in Chinese expansion, bond investor PIMCO says in a new economic outlook released Thursday. The 17-nation euro zone is facing recession in 2012 because of sovereign debt problems, while China will likely slow its growth to around 7% next year, causing global expansion to slow. PIMCO’s Saumil Parikh forecasts the global economy to grow between 1% and 1.5% in 2012, down from the 2.5% growth rate seen in 2011. The biggest problem facing the global economy is a likely recession in the euro zone, which is facing broad deleveraging from its banking sector and individual countries themselves as leaders try to get the debt crisis under control, PIMCO said in the report. Countries will institute austerity measures, which will drag on growth between 1.5 and 2 percentage points over the next two years, wrote Parikh, a managing director with the investment firm. That, coupled with sovereign debt haircuts and defaults, are likely to cause the region’s economy to shrink between 1% and 1.5% in 2012. The lack of growth could be magnified further if both countries and banks try to sharply deleverage their balance sheets at the same time

Worse Than 2008 - cmartenson - There are clear signs of a liquidity crunch in the asset markets right now, and the question I keep hearing is, Is this 2008 all over again? No, it’s worse. Much worse. In 2008 there was a lot more faith and optimism upon which to draw. But both have been squandered to significant degrees by feckless regulators and authorities who failed to properly address any of the root causes of the first crisis even as they slathered layer after layer of thin-air money over many of the symptoms. Anyone who has paid attention knows that those "magic potions" proved to be anything but. Not only are the root causes still with us (too much debt, vast regional financial imbalances, and high energy prices), but they have actually grown worse the entire time. As always, we have no idea exactly what is going to happen and when, but we can track the various stresses and strains, noting that more and wider fingers of instability increase the risk of a major event. Heading into 2012, there's enough data to warrant maintaining an extremely cautious stance regarding holding onto one's wealth and increasing one's preparations towards resilience.

The New International Economic Disorder - A new economic order is taking shape before our eyes, and it is one that includes accelerated convergence between the old Western powers and the emerging world’s major new players. But the forces driving this convergence have little to do with what generations of economists envisaged when they pointed out the inadequacy of the old order; and these forces’ implications may be equally unsettling. For decades, many people lamented the extent to which the West dominated the global economic system. From the governance of multilateral organizations to the design of financial services, the global infrastructure was seen as favoring Western interests. While there was much talk of reform, Western countries repeatedly countered serious efforts that would result in meaningful erosion of their entitlements.  On the few occasions that such resistance was seemingly overcome, the outcome was gradual and timid change. Consequently, many emerging-market economies lost confidence in the “pooled insurance” that the global system supposedly put at their disposal, especially at times of great need. This change in sentiment was catalyzed by the financial crises in Asia, Eastern Europe, and Latin America in the late 1990’s and early 2000’s, and by what many in these regions regarded as the West’s inadequate and poorly designed responses. With their trust in bilateral assistance and multilateral institutions such as the International Monetary Fund shaken, emerging-market economies – led by those in Asia – embarked on a sustained drive toward greater financial self-reliance.

The shaky edifice of global finance - Much of being made of the profligacy of southern European countries, their unsustainable levels of debt. It is worth asking how big this debt is in the overall scheme of things. You get some interesting answers. According to McKinsey & Company, global public debt last year was about $41 trillion. Private debt, consisting of financial institution bonds, non-financial corporate bonds, securitised loans and non-securitised loans is estimated at $117 trillion. So how big are these European debts in that context? Italian debt is $2.4 trillion, about 118% of GDP. It is 1.2% of global debt. Spain’s $900 billion, or 60% of GDP is 0.5% of the global total. Germany’s $2.6 trillion (78% of GDP) is 1.6% if the total. France’s $2 trillion (80% of GDP) is 1.8% of the total and the UK’s $1.8 trillion (80% of GDP) is 1.1% of the total. Add up them all and it is only 6.1% of the total global debt. The US has $15 trillion in debt, a touch over 100% of GDP and Japan as $12 trillion in debt or 225% of GDP. And the profligacy is where, again? The bigger point is that sovereign debt is only 25% of the total, most of it American and Japanese, both of which are special cases. The US has the world’s reserve currency, so can rack up debt with relatively little risk of being punished, until such time as there is a genuine alternative to the greenback as the reserve currency — for which read the floating of the yuan, assuming that the euro stays intact in some form. Japan is hermetically sealed off, owing the debt it itself.

Plan B – How to loot nations and their banks legally - Is there a plan B? That question is usually asked of governments regarding their attempts to ‘save’ the banks domiciled in their country. But has anyone asked if the banks have a plan B? Does anyone think that if our governments fail to keep to their austerity targets and fail to keep bailing out the banking sector, that the banks will just shrug and say, “Well, thanks for trying” and accept their fate? Or do you think the banks might have a Plan B of their own? First let’s be clear about Plan A. That plan is to enforce an era of long-term austerity cuts to public services, in part to cut public expenditure so as to free up money for spending on the banks, but perhaps more importantly to further atrophy public services so that private providers can take over. A privatization of services which will bring great profits and cash flow to the private sector and to the banks who finance them, and a further general victory for those who feel that private debts rather than public taxes should be what underpins our national life and social contract. Plan A therefore requires that governments convince their populace that private debts should be taken on to the public purse and that once taken on, the contracts signed by governments on behalf of the tax payers/citizens, are then sacrosanct and above any democratic change of mind. If governments can hold their peoples to this,then the banks are ‘saved’ with the added bonus that democracy and the ‘Rights’ it once guaranteed will all have been redefined as subordinate to finance and its contracts, and our citizenship will have become second to one’s contractual place in a web of private debts. It is, in my view, a bleak future which I once described as A Toxic Debt Wasteland.

NEVER BAILED OUT: Europe’s ants and grasshoppers revisited «- Once upon a time a Greek called Aesop told the story of the industrious ant and the profligate grasshopper. Over the past two years, the Greeks have earned an international reputation as Europe’s grasshoppers, with the Germans in the role of the ants. Alas, the Greeks’ reputation has now spread westwards and even northwards (toward the Emerald Isle) as all sorts of non-Greeks are painted with the same paintbrush. The now infamous bailout packages for Greece have propagated the view that the eurozone is divided simply between northern ants and southern grasshoppers. That with the warmth of the euro’s summer days behind us, now that the easy money from Wall Street and the City have disappeared, a winter of discontent has descended upon us all due to the grasshoppers’ idleness. Thus the dominant story in Europe today is that, in the frozen mists of this awful winter, the southern grasshoppers are knocking on the northern ants’ doors, cap in hand, seeking one bailout after the other. The ants, understandably, are coy and will only respond if the grasshoppers promise to change their ways. In short, the stocks that the ants accumulated for the heavy winter are being endangered by hungry, careless grasshoppers who resist changing their profligate ways.

Eurozone Construction Output Falling  - As of October.  However, in fairness, that last little jog down is no bigger than similar jogs down in Jan 2010 and at the beginning of 2011 - and those proved to be transitory.  So, while this is consistent with other indicators that the Eurozone is in the early stages of a new recession, it is considerably short of conclusive proof.

Credit Agricole quits commodity trade as crisis bites - Credit Agricole, the formerly farm-focused bank that had boosted its energy trading in recent years, warned on Wednesday of losses and write-downs as it struggles to cope with the credit crunch. The cuts come just weeks after rival Societe Generale (SOGN.PA) shut down its year-old U.S. gas and power trading desk, and leader BNP Paribas (BNPP.PA) consolidated. The deepening euro zone debt crisis has hit French banks hard as traditional sources of dollar funding have evaporated and as they face pressure to meet tougher capital requirements. Volatile commodity prices, dimmer growth prospects and tougher regulation are also forcing some firms to question the outlook for the decade-long boom in trading raw materials. Cargill Inc. CARG.UL, which has voiced a bleaker economic outlook for next year than most of its peers, is cutting 125 jobs worldwide from its energy, transportation and metals operations as part of plans to reduce 2,000 or 1.4 percent of its global workforce over the next six months. Trade sources said more companies may follow.

Twice-Told Irish Tales - Krugman - One thing I meant to mention when discussing Ireland is something Kevin O’Rourke pointed out: this is the second time in two years that Ireland has been declared a success story for austerity based on a slight uptick, soon reversed. The first time was in mid-2010, when we had the likes of Alan Reynolds at Cato pronouncing Ireland’s spending cuts a triumphant success and a confirmation of expansionary austerity; I believe that the perception of Irish success was a significant factor in Cameron’s decision to go all-in for austerity in Britain. The second time was this fall, with just about all of Europe’s Very Serious People pronouncing Ireland on the way to recovery. One thing you’ll hear about Ireland, by the way, is that it’s really good news that it has moved into current account surplus. But Ireland never had all that big a current account deficit; if you look at how much the balance has improved, it’s not much more than in Spain: What all this shows is how much people want to believe in successful austerity, and the way they seize on the tiniest piece of evidence as confirmation of their beliefs.

A Modest Forecast: The Average Real Growth in Ireland will Exceed 10% a Year From 2012 to 2014 - You read the title correctly: the Irish economy will grow by more than 10% next year. Now, hearing that, you might be asking yourself: "Is this guy for real? He must be nuts."  Because I've looked around and nobody is predicting that sort of growth for Ireland for the next few years. So let me lay out ten facts that should make it obvious to just about everyone:

Hungary's Constitutional Revolution - Last week, Paul Krugman’s column “Depression and Democracy” called attention to Hungary’s “authoritarian slide.” Since I was one of the sources for Paul’s column, I’d like to explain why I have been alarmed at the state of both constitutionalism and democracy in Hungary. In a free and fair election last spring in Hungary, the center-right political party, Fidesz, got 53% of the vote. This translated into 68% of the seats in the parliament under Hungary’s current disproportionate election law. With this supermajority, Fidesz won the power to change the constitution. They have used this power in the most extreme way at every turn, amending the constitution ten times in their first year in office and then enacting a wholly new constitution that will take effect on January 1, 2012. This constitutional activity has transformed the legal landscape to remove checks on the power of the government and put virtually all power into the hands of the current governing party for the foreseeable future. The new constitution has attracted a great deal of criticism from the Venice Commission for Democracy through Law of the Council of Europe, the European Parliament and the United States. But the Fidesz government has paid no attention.

Spain grits teeth yet again as austerity deepens - Spain's new premier Mariano Rajoy has launched a fresh blast of fiscal austerity at his inauguration, describing the national outlook as "desolate" and his task like that of a father feeding four hungry mouths with bread for two. The conservative leader pledged to fight Spain's unemployment curse by shaking up the labour markets. The jobless rate has hit 22.8pc with 5.4m people out of work. The tally is certain to rise further as the economy falls back into recession.  Spain's 10-year bond yields dropped to 5.09pc, far below the 6.5pc stress peak seen last month, even though Mr Rajoy said the government will miss its budget deficit target of 6pc of GDP this year.  Global funds are gobbling up Spanish and Italian debt on bets that lenders will exploit the European Central Bank's offer of three-year credit at 1pc to buy sovereign debt, playing the "carry trade" on the yield spread.

Can Italy survive the financial storm? -The fate of the euro and the fate of Italy are now intertwined.  The euro will not survive if Italy is forced to default because its government can no longer refinance the part of its €1.5 trillion debt coming due every year.  The firepower of the European Financial Stability Facility (EFSF) would not be sufficient to safeguard Italy, even if the IMF were to provide a couple of hundreds of billions of additional funding. . In short, Italy is too big to fail, but also too big to save. Can Italy save itself? Some analysts are pessimistic (Manasse 2011) but I believe there still is a path to success. If Italy is too big to fail and too big to save, how can it save itself? This column suggests a survival strategy. The Italian households should finance their own government by buying its debt, and the ECB should prevent a collapse of the Italian banking system.

Draghi warns on eurozone break-up - Mario Draghi has warned of the costs of a eurozone break-up, breaching a taboo for a president of the European Central Bank, even as he sought to play down market expectations about the ECB’s role in combating the sovereign debt crisis. Mr Draghi’s willingness to discuss a scenario for Europe’s 13-year-old monetary union that his predecessor, Jean-Claude Trichet, simply described as “absurd,” highlights the high stakes in the eurozone debt crisis, which has rattled global financial markets. In his first interview since becoming ECB president on November 1, Mr Draghi said struggling eurozone countries that quit the currency bloc would face still greater economic pain. For remaining members, European Union law would have been broken and “you never know how it ends really,” he said. Countries that left and devalued their currency would create “a big inflation” and fail to escape from structural reforms that would still have to be  To fight the crisis, Mr Draghi stressed the importance of unprecedented measures taken by the ECB to shore-up eurozone banks – which include its first ever offer of unlimited three-year loans this week. He emphasised, however, that the region’s politicians had to take the lead in rebuilding investor confidence in eurozone public finances – by ensuring fiscal discipline and making fully operational Europe’s rescue fund, the European Financial Stability Facility.

E.C.B. Warns of Dangers Ahead for Euro Zone Economy -  The European Central Bank1 warned Monday of a perilous year ahead as the sovereign debt crisis2 collides with slower economic growth and a dearth of market financing for banks.  The dire prediction, contained in the E.C.B.’s twice-yearly report on the risks to the euro3 area financial system, came as E.U. governments fell short of their target to expand their backup plan for the euro by channeling more resources through the International Monetary Fund.  By some measures, the stresses on the European financial system are approaching or even exceeding levels last seen after the bankruptcy of Lehman Brothers in September 2008. For example, market perception of the risk that two large banks in the euro area could fail in the next year has surpassed the previous peak in 2009, according to the E.C.B.’s Financial Stability Review.  “The transmission of tensions among sovereigns, across banks and between the two intensified to take on systemic crisis proportions not witnessed since the collapse of Lehman Brothers three years ago,” the report said.

ECB Chief Warns Of Costly Eurozone Break-Up - Newly-appointed European Central Bank president Mario Draghi has warned that any country leaving the eurozone to escape the debt crisis would be worse off. Breaking an ECB taboo by considering a break-up of eurozone countries, Mr Draghi told the Financial Times, that leaving the euro was not the answer to the problem. "This wouldn't help. Leaving the euro area, devaluing your currency, you create a big inflation, and at the end of that road, the country would have to undertake the same reforms that were due to begin with, but in a much weaker position," he said. In his first interview since taking on the top job on November (Stuttgart: A0Z24E - news) 1, he told the newspaper that a break-up would also create stresses and unknown consequences for those nations remaining in the euro. "You would have a substantial breach of the existing treaty. And when one starts with this you never know how its ends," he said.

ECB warns of global contagion risks - The European Central Bank has warned that the eurozone debt crisis could spread to engulf further member states, creating risks to financial stability that could reverberate around the world “Contagion of euro area sovereign debt strains remains the most pressing risk for financial stability in the euro area, the European Union and even across the globe,” said the ECB’s latest eurozone financial stability review, released on Monday.  The comments hinted at ECB concern over politicians’ failure to bring the crisis under control, and at the danger of countries’ fiscal austerity plans being derailed by domestic politics. Separately, Mario Draghi, ECB president, told the European parliament in Brussels that draft changes to European treaties strengthening fiscal rules were a “first step” but could be “made much better”. Many EU leaders believe that Mr Draghi’s approval of the treaty’s “fiscal compact” is a prerequisite to more ECB intervention in eurozone bond markets. According to the ECB, eurozone bond market volatility had reached levels seen after the collapse of Lehman Brothers investment bank in 2008 – and were higher than in May 2010, when the eurozone crisis last reached a peak . Its report said the eurozone countries most vulnerable to contagion were those with weak public finances and financial systems – without naming examples.

Why ECB lending won’t solve the euro crisis - “By this time next week,” says Simone Foxman, “the euro crisis could be over”; she obviously doesn’t think much of Fitch’s analysis, which concludes that “a ‘comprehensive solution’ to the eurozone crisis is technically and politically beyond reach”. I’m with Fitch on this one. But it’s worth looking at the bull case for the eurozone, as spelled out by the likes of Foxman and Tyler Cowen. At heart, it’s pretty simple:

  1. The way to solve the euro crisis, at least for the next couple of years, is for the ECB to act as a lender of last resort.
  2. The ECB is, quietly, doing just that — specifically by lending money for as long as three years against a much wider range of collateral than it accepted in the past.
  3. Even though that money is going to banks rather than sovereigns, the banks will borrow as much as they can, at interest rates of about 1%, and invest the proceeds in Spanish and Italian debt yielding more like 6%, in a massive carry trade.
  4. Which means that the ECB is, effectively, printing hundreds of billions of euros and lending it to distressed European sovereigns after all.

ECB Admits to Losing Control - I have been off the case, but thankfully Izzy has not. She confirms that all of the ECB were about collateral crunch fears and concerns that it no longer had control over monetary policy. Finally — and this is the clincher we feel — the measures as a whole were designed to give the ECB back some control of interest rates in private collateralised funding markets, which are now veering off official policy course: Overall, all measures mentioned aim to ensure enhanced access of the banking sector to liquidity and facilitate the functioning of the euro area money market, thereby avoiding severe limitations to the real economy from a lack of financing possibilities. This also helps ensure that the official interest rates set by the ECB are transmitted in an appropriate way to the economy, and in that way help maintaining price stability in the medium term. If that’s not a clue to the fact that the ECB is worried about losing control of transmission mechanisms, we don’t know what is.

Weaker euro will help solve Europe deficit woes - The large current account deficits of Italy, Spain and France can be reduced without lowering their incomes or requiring Germany to accept inflationary increases in its domestic demand. The key is to expand the net exports of those trade deficit countries to the world outside the eurozone. Those current account imbalances are the result of imposing a single currency on 17 eurozone countries. If their exchange rates were free to vary, normal market pressures would cause the currencies of Italy, Spain and France to decline relative to Germany’s, stimulating exports and reducing their imports while also shrinking Germany’s trade surplus. The politicians who planned the euro generally did not think about future current account imbalances or other economic problems. They wanted the euro as a means of accelerating political integration. Although the exchange rates at which countries entered the eurozone were negotiated to avoid initial trade imbalances, different future rates of wage increase would inevitably lead to trade imbalances. Those politicians and bureaucrats who recognised this problem believed that the single currency would somehow eliminate it by causing productivity trends to converge.

One nation overdrawn - The Economist - IN THE frantic race to save the euro, many Europeans have sought inspiration from the United States, perhaps the most successful monetary union in history. Germany’s council of economic experts has proposed a debt “redemption pact” modelled on the American federal government’s assumption of state debts in 1790. To European federalists, America demonstrates that monetary union cannot survive without fiscal union. And proponents of a European lender of last resort to insulate sovereigns from liquidity crises note how America can still borrow at 2% thanks to a deep and liquid government bond market backstopped by the Federal Reserve. Look more carefully, however, and the American example is more complicated. Fiscal and currency union did indeed kick-start America’s early economic development. But fiscal and monetary frameworks were so rudimentary that they contributed little to nation-building.

EU Ministers Seek Crisis IMF Funding as Confidence Wanes -- European finance ministers will today seek to meet a self-imposed deadline for drawing additional aid to the debt crisis and to form new budget rules as investor confidence that a comprehensive solution is achievable wanes. Euro-area finance ministers will hold a conference call at 3:30 p.m. Brussels time to discuss 200 billion euros ($261 billion) in additional funding through the International Monetary Fund and the mechanics of a so-called fiscal compact that was negotiated at a Dec. 9 European Union summit, according to two people familiar with the planning. "They'll try to get as much done as they can before Christmas, but it's doubtful they'll put markets in a Christmas mood," Carsten Brzeski, an economist at ING Group in Brussels, said in an interview. "There is still so much uncertainty." The accord to ratchet up budget rules failed to ease concern that the monetary union risks buckling under the weight of the two-year-old crisis. Fitch Ratings lowered France's credit outlook and put other euro-area nations on review Dec. 16, saying an overall crisis solution may be "technically and politically beyond reach." Belgium's rating was cut two levels to Aa3 by Moody's Investors Service on the same day.

EU Loans To IMF Likely To Fall Short Of Expected EUR200 Billion: Sources - Euro-zone finance ministers will try Monday to finalize a loan to the International Monetary Fund, but the European Union as a whole is unlikely to meet the EUR200 billion target set by leaders on Dec 9, IMF and euro-zone officials said. "There will be an effort to get an agreement on the EUR150 billion committed by the euro zone, but it's not certain it will happen today and it certainly looks like we'll fall short of the total EUR200 billion by all of the EU," said a senior IMF official, who has direct knowledge of the talks. The finance ministers will hold a conference call later Monday to put in place a EU summit decision that called on euro-zone central banks to dole out EUR150 billion from their reserves in loans to the IMF so that it has the firepower to help out European countries in distress. Another EUR50 billion was due to be contributed by EU nations outside the 17-member euro zone.

Fitch may cut France, six more euro zone countries (Reuters) - Fitch Ratings on Friday warned it may downgrade France and six other euro zone countries as it believes that a comprehensive solution to the region's debt crisis is "technically and politically beyond reach." France's possible downgrade is not imminent but could come in two years, Fitch said in a statement, as it revised the outlook of the country's AAA rating to negative. For the other countries - Belgium, Cyprus, Ireland, Italy, Slovenia and Spain - a downgrade could come much sooner. Those nations, which already had a negative rating outlook from Fitch, were placed on credit watch negative, which traditionally signals the possibility of a downgrade within three months at most. "The systemic nature of the euro zone crisis is having a profoundly adverse effect on economic and financial stability across the region," Fitch said, adding that commitments made by EU leaders in a summit last week did little to ease its concerns. EU leaders last Friday secured a historic agreement to draft a new treaty for deeper economic integration in the euro zone, but more decisive measures to stem the debt crisis remained uncertain. A new treaty could take three months to negotiate and may require referendums in countries such as Ireland.

Too old to care about tomorrow - I've become increasingly sceptical of the value of analyses of decisions now that attempt to assess the costs and benefits of action over horizons any longer than a decade. I don't know quite when this happened, though I suspect that the euro crisis has had something to do with it. And I don't doubt that many of you have been thinking this way for ages. It's a new and uncomfortable development for me, though. So when Tyler Cowen muses about whether it might not be better to break up the euro now, I have no idea how to begin assessing the idea. My sense is that this is not at all a good idea, because it's sure to be very unpleasant over the short to medium term, and that's as far out as we can reasonably hope to analyse. I find myself thinking about people who lived in the 1840s. What decisions should Europeans and Americans have been taking then? Might it have been a good idea to go ahead and break up the American union? Doing so might well have prevented a terrible war two decades later.

The eurozone crisis is not about market discipline - Dean Baker - The people who gave us the eurozone crisis are working around the clock to redefine it in order to profit politically. Their editorials - run as news stories in media outlets everywhere - claim that the euro crisis is a story of profligate governments being reined in by the bond market. This is what is known in economics as a "lie". The eurozone crisis is most definitely not a story of countries with out of control spending getting their comeuppance in the bond market. Prior to the economic collapse in 2008, the only country that had a serious deficit problem was Greece. In the other countries now having trouble financing their debt, the debt to GDP ratio was stable or falling prior: Spain and Ireland were actually running budget surpluses and had debt to GDP ratios that were among the lowest in the OECD.    The crisis changed everything. It threw the whole continent into severe recession. This had the effect of causing deficits to explode since tax revenues plummet when the economy contracts and payments for unemployment benefits and other transfer programmes soar. Spain was hit especially hard by this contraction because it had a huge housing bubble. This bubble fuelled an enormous construction boom that went bust after the crash. Ireland saw its debt explode because it got stuck with a huge bill from bailing out its free-wheeling bankers.

Spiegel: 'The Euro-Zone Bailout Programs Must Be Stopped' - How to save the euro? Some believe that the European Central Bank is the key to any solution. Others think that the euro zone should be contracted and the weak members squeezed out. SPIEGEL spoke with two leading German economists about the currency's future. Their one area of agreement? Something must be done quickly.

How to Save Europe (and the World) Without Even Crying - From my Deep Dive at FP Before anything else, the banks must be saved, most likely through an open-ended lending facility like the Federal Reserve’s Term Auction Facility (TAF). They must come before taxpayers, before pensioners, before the reforms that might transform southern Europe into a dynamic player in the global economy. Not because it is fair or just or right. It is none of these things. It must happen because we have constructed a global economy that has massive international banks at its heart. Money, banking, and credit lubricate the billions of transactions that happen around the world every day. If the global financial system collapses, so will trade. Though, I lied. There will be lots of crying.  The series also contains pieces from some lesser known – but still quite good – economists like Barry Eichengreen and Larry Summers.  The whole thing is self-recommending – as in, I am recommending myself. And, I am an excellent judge of character, if I do say so myself.

Only 9 Nations Will Be Needed To Ratify Europe’s Fiscal Treaty — A new treaty to impose tighter discipline among the 17 nations in the European Union that use the euro1 will come into force once nine countries approve it, according to a draft released Friday. That potentially reduces the threat that disapproval by one nation could scuttle the pact. The treaty is intended to help improve confidence in the euro by tightening the coordination of the 17 euro zone economies, requiring nations to balance their budgets and cut debt. The outline of the plan was agreed to by most European leaders a week ago, with the exception of Britain. European officials hope to reach agreement on the eight-page draft of the treaty within weeks, with Britain being offered observer status in discussions. The treaty will enter into force “on the first day of the month following the deposit of the ninth instrument of ratification by a contracting party whose currency is the euro,” the draft states. That means that if one country held a referendum on the treaty and did not approve it, the decision would not block others from putting it in place once nine other nations ratified it. The terms of the treaty will, however, apply to each country only when the country ratifies it.

Paris and London go toe-to-toe - The big news out of Europe over the weekend was the downgrading of Belgium by Moody’s: Belgium’s credit rating was cut two steps by Moody’s Investors Service, which said rising borrowing costs, slowing growth and liabilities from Dexia SA’s breakup (DEXB) threaten to inflate the euro area’s fifth-highest debt load. Moody’s lowered Belgium’s debt rating to Aa3, the fourth- highest investment grade, from Aa1, with a negative outlook, the ratings company said yesterday.  We also saw some action from Fitch with a rating review of Europe in which they took a swipe at nearly half of the Eurozone: France’s credit outlook was lowered by Fitch Ratings, which also put the grades of nations including Spain and Italy on review for a downgrade, citing Europe’s failure to find a “comprehensive solution” to the debt crisis. Fitch affirmed France’s AAA rating and placed Spain, Italy, Belgium, Slovenia, Ireland and Cyprus on a “Rating Watch Negative” review, which it expects to complete by the end of January.  An interesting sideshow to the rating agencies work has been the politicking between Paris and London. It began after the head of the French central bank made comments that the rating agencies were making decisions based on politics not economics and that UK should be the place to start downgrades:

UK will fare better in this Anglo-French spat - Last week’s series of comparative statements were obviously co-ordinated. What I find intriguing about them is their sheer desperation. The French economic policy elite no longer understand the world. They genuinely believe that they are doing better than the British. The French private sector is in much better shape. The country is committed to the righteous path of fiscal austerity. So why should the rating agencies be downgrading France and not Britain? It is just not fair. Or is it?  There is an obvious gap between the economic narratives. Eurozone leaders believe they have solved the crisis by agreeing a fiscal compact. It was a definitive decision, taken at the European summit of just over a week ago. There will be no fiscal union, no eurobonds, no European Central Bank bail-out. The adjustment will happen through austerity alone – and it will go on and on. A rule to allow a maximum deficit of 0.5 per cent of gross domestic product will in the long run eliminate most public sector debt. The world’s second-largest economy wants to repay all its debts. The UK government has been conducting a programme of quite extreme pro-cyclical fiscal austerity as well. But there are two differences. The first is a flexible exchange rate – though this offers diminishing marginal returns when everyone pursues the same policy. The second, and most important, is that Britain has its own central bank. The Bank of England has been conducting a much more aggressive monetary policy than the ECB.   

Euro Zone IMF Loan Target in Danger as UK Declines - Euro zone ministers agreed on Monday to boost IMF resources by 150 billion euros (125.8 billion pounds) to ward off the debt crisis and won support for more money from EU allies, but it was unclear if the bloc would reach its 200 billion euro target after Britain bowed out. Following a three-hour conference call, European Union finance ministers said currency zone outsiders the Czech Republic, Denmark, Poland and Sweden would also grant loans to the International Monetary Fund to help save the 17-nation zone. But the EU said those lenders must first win parliamentary approval, while Britain made it clear it would not participate in the plan. That leaves the euro zone more reliant than ever on major economies such China and on Russia, which has shown willingness to lend more to the IMF. The United States for its part is concerned about the lender's exposure to the euro zone. Ministers had set an informal deadline of Monday to arrive at the 200 billion figure, which was agreed by EU leaders at a summit on December 8-9. and urged other nations to take part. "Euro area member states will provide 150 billion euros of additional resources through bilateral loans to the fund's general resources account," the EU finance ministers said in a joint statement after their call.

Euro zone IMF lending plan in danger as UK declines - European finance ministers looked unlikely to reach a target of boosting IMF resources by 200 billion euros to ward off the debt crisis on Monday, after Britain said it would not take part in a plan aimed specifically at helping the euro zone. In a three-hour conference call, ministers also assessed plans for tighter euro zone fiscal rules - a new 'fiscal compact' - that policymakers hope will insulate the 17-country currency zone against a repeat of the two-year debt crisis. Treasury sources said Britain had made it clear on the call it would not participate in the plan to increase IMF resources by up to 200 billion euros, with 150 billion of coming from euro zone central banks. While Sweden said it would take part, with conditions, Britain's decision to stay on the sidelines means it is unlikely the headline goal will be reached. Ministers had set an informal deadline of Monday to arrive at the 200 billion figure, which was agreed by EU leaders at a summit on December 8-9.

Is Britain About To Scuttle The Last Ditch "Plan Z" European Bailout? - As is by now well known, it was the British refusal to budge and thus agree to the fiscal compact from the December 9th summit, that led to the realization that the European bailout is now further away than ever before. And as reported earlier, tomorrow European finance ministers will sit down to finalize the terms of a €200 billion IMF injection, funded by various European governments, which is the last ditch rescue effort now that the EFSF and ESM have both failed to convince the market of a long-term solution. Enter Britain. Again. Because as the Telegraph reports, it will be up to Britain to fund not just any portion of the upcoming €200 billion payment, but the second largest one, a commitment which David Cameron and the majority of Britain will likely balk at. "Figures suggest European Union officials expect British taxpayers to be the second largest contributor. The Prime Minister has repeatedly promised not to provide any extra funding for the IMF for the specific purpose of saving the euro and Britain is already liable for £12 billion of loans and guarantees to Ireland, Greece and Portugal...An EU official said Britain was still expected to contribute €30.9 billion (£25.9 billion), leaving the country as the second biggest contributor to the new IMF fund behind Germany and equal with France."

U.K. Shuns Crisis Aid as Europe Channels $195 Billion to IMF -- Europe bolstered its anti-crisis arsenal, channeling 150 billion euros ($195 billion) to the International Monetary Fund as the European Central Bank widened its support for sagging bond markets. Four countries not using the single currency also pledged to add to the IMF war chest while Britain refused to commit, preventing officials from reaching the 200 billion-euro target to ease the euro area's home-grown debt burdens. The U.K. will "define its contribution" in early 2012, euro finance ministers said in a statement after a conference call yesterday. The IMF track is "obviously a small-scale solution,". "What really would be needed in the ideal world would be euro bonds or a substitute which can bring large-scale liquidity and confidence into the markets." Germany continued to oppose an early decision to raise the limit of 500 billion euros on overall emergency aid. European leaders plan to tackle that question by March. Still, the IMF infusion and jump in ECB bond purchases indicated that Europe is wielding more money instead of relying on budget cuts alone to persuade investors to return to markets scarred by two years of burgeoning debt and threatened defaults.

Europe Is Now Officially Bazooko's Circus - Italy To Provide €23.5 Billion In IMF Cash To Bailout Italy - The EU was already embarrassed into releasing a press release that it could procure €150 billion in Eurozone contributions to the IMF rescue, now that the UK is out of the picture and the December 9 Eurosummit agreed upon total of €200 billion including non-Eurozone contributors (mostly the UK with €30.9 billion) has been "adjusted." Now we find that the rabbit hole goes even deeper into Bazooko's Circus because according to a just released update, of the remaining meager €150 billion in funding, Germany will be responsible for €41.5 bn, France at €31.4 billion, and Italy will need to provide €23.5 billion and Spain another €15 billion. To, you know, bailout Italy and Spain. #Ref! 

ECB's Christmas liquidity boost - The European Central Bank’s long-term refinancing operation, which seems to be rippling through markets in advance of bidding results announced Wednesday, may be a boon to debt-stretched European nations now. But it raises some worrisome questions about what happens if it’s really successful — and European banks stock up on even more sovereign debt. First a little explainer about what’s happening. On December 8, the ECB announced a series of liquidity operations designed to ease a credit squeeze that had been driving up yields on benchmark Italian and Spanish debt to eye-popping, unsustainable levels over 6%. The news was largely overshadowed by keen market disappointment that the ECB’s Mario Draghi didn’t signal the central bank was ready to expand its own sovereign-debt purchase program to backstop skyrocketing yields. Read ECB’s announcement. One of those operations, dubbed LTRO, allows  banks to borrow three-year loans at a  discount against a wider range of collateral, presumably to spur them into buying European sovereign debt in the place of the ECB. Those cheap loans — the Wall Street Journal notes rates could hover around 1% — look attractive compared to  Italian yields of about 6% for both 5-year and 10-year bonds. Analysts said some of Tuesday’s drop in Italian and Spanish bond yields, and corresponding big-time rally in U.S. stocks and easing in the safe-haven dollar, may have to do with European banks buying up debt in advance of the operation.

Everything You Need To Know About Tomorrow's Big ECB Operation That Everyone's Watching - All eyes will be focused on Europe tomorrow, when the European Central Bank publishes statistics about a new, 3-year bank funding operation (LTRO) meant to ease liquidity for the banks. Bulls have been hoping that this funding operation will amount to a back-door bailout vis a vis the banks, as more liquidity could drive down sovereign borrowing. However most analysts and even ECB president Mario Draghi are less than optimistic about the true impact of the financing measures. The plan The new plan expands the list of eligible collateral banks can put up in return for funding from the central ban. Most notably, they've expanded the list of eligible collateral to include credit claims (i.e. loans) and asset-backed securities issued at "A". Banks will—as usual—be forced to pay a penalty for using riskier assets, but they'll be able to use less collateral than previously required after the ECB cut the reserve ratio in half, from 2% to 1%. Image: BloombergBulls' hope is that banks will capitalize on the long term operation and the low price of funding to use in a carry trade—they'll by Italian and Spanish sovereign bonds in big quantities because yields have been so elevated lately, and they'll make a killing off the difference between the sovereign bond yields and the price of ECB financing. We've seen this idea manifest lately in the popularity of short-term sovereign debt, as evidenced by the demand for 2-year Spanish bonds (at left). Yields have plummeted as banks buy Spanish debt in preparation for the trade. Italian 2-year yields have also fallen sharply, back down to levels not seen since November.

ECB Invites Euro-Area Banks to Place Orders for Three-Year Cash (Bloomberg) -- The European Central Bank is set to flood euro-area banks with cheap cash as they flock to its offer of three-year loans today. Banks will ask the ECB for 293 billion euros ($384 billion) of the 1,134-day funds, according to the median of 14 forecasts in a Bloomberg News survey of economists. Estimates range from 150 billion euros to as much as 600 billion euros. The money will be lent at the average of the ECB’s benchmark rate -- currently 1 percent -- over the period of the loan. Results are due at 11:15 a.m. in Frankfurt and the loans start tomorrow. “This is basically free money,” . “The conditions are unbeatable. Everybody who can will try to get a piece of this cake.” Europe’s debt crisis has increased the risk of government and bank defaults, making institutions wary of lending to each other and driving up the cost of credit. The ECB is trying to ensure that banks have access to cheap cash for the medium term so that they can keep lending to companies and households. In addition to the longer-term loans, the ECB has widened the pool of collateral banks can use to secure the funds.

The ECB’s all you can eat cheap money buffet – a primer -Ahead of Wednesday’s main event – the 3-year Long Term Refinancing Operation – we present a brief preview via Rabobank. It brings together much of what we have been writing about over the past couple of days – the sharp decline in demand for the Main Refinancing Operation on Tuesday and the take up for the one-day fine tuning, or bridging, facility – to make a couple of points First, any sub-€300bn number is likely to be taken badly by the market. Second, it will take a truly monumental number (€400bn plus) to generate anything other than a yawn from investors. In other words — prepare to be disappointed

Successful Spanish Debt Auction. Spain’s borrowing costs plummeted Tuesday at a debt auction, helping to lift the euro and stocks, as the European Central Bank began rolling out a new lending program that could encourage banks to buy euro-zone government bonds.  The Spanish Treasury sold €5.6 billion, or $7.3 billion, of debt, more than the €4.5 billion it had planned to sell after it met with solid demand. It sold three-month bills priced to yield 1.74 percent, down from the 5.11 percent it paid to sell similar securities on Nov. 22. It also sold six-month debt securities at an average yield of 2.44 percent, compared with the 5.227 percent it paid in November.  . Analysts attributed the positive result — as well as a strong Spanish auction last week — partly to the new E.C.B. initiative.  The central bank on Dec. 8 cut its main interest rate target to 1 percent from 1.25 percent, and said it would begin offering banks unlimited loans of up to three years at that rate, from a maximum of one year previously. It also said it would accept a wider range of collateral for those loans. The program, officially known as a long-term repo operation, “is very important,” Laurent Fransolet, a European rate strategist at Barclays Capital in London, said. “but it’s not easy to understand, so many commentators haven’t been focusing on it.”

French Banks Rush to Raise EU37 Billion in Early 2012 Funds -- BNP Paribas SA, Societe Generale SA, Credit Agricole SA and Groupe BPCE, France’s biggest banks, are struggling to fund about 37 billion euros ($48 billion) of debt payments due in the first quarter. As their access to U.S. dollar short-term funds dries and they face soaring costs in the bond market, French lenders are raising money by selling their debt through structured products and issuing bonds backed by mortgages on properties in Paris and regions including Cote-d’Azur, the French Riviera playground of the rich. The European Central Bank is also offering them three- year loans through a facility, which opened today. “It’s gotten harder and harder to get refinancing on the markets, and as time goes by rating agencies are taking negative actions, pushing up already high funding costs,”French banks’ credit ratings were cut this month by Moody’s Investors Service, which cited funding constraints and a worsening European debt crisis. Their ability to raise money is limited by their public and private debt holdings in the five countries at the heart of Europe’s crisis -- Greece, Portugal, Ireland, Spain and Italy -- which as of June were the world’s biggest at $681 billion.

Italian Banks Are Said to Use State-Guaranteed Bonds to Receive ECB Loans - UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP) are among Italian banks that used bonds guaranteed by Italy as collateral to obtain loans from the European Central Bank at today’s auction, two people with knowledge of the matter said. Italian banks issued about 40 billion euros ($52 billion) in state-backed bonds, the Italian exchange said in a filing yesterday. UniCredit issued 7.5 billion euros of the bonds and Intesa Sanpaolo created 12 billion euros of notes maturing in March. The bonds were to be used as collateral for the ECB auction, two people familiar with the situation said yesterday. Italy’s biggest lenders met Italian Deputy Finance Minister Vittorio Grilli yesterday to define the terms of the transaction, said the people, who asked not be named because the talks are private. The Treasury agreed to back the bonds, which the banks will keep on their books, using rules introduced by Prime Minister Mario Monti two weeks ago, the people said. The plan, which is part of a law approved Dec. 4, allows the Treasury to offer guarantees for bonds issued by banks in order to give them more access to ECB liquidity, an effort to lower funding costs. The debt crisis has increased the risk of Italy’s sovereign debt, driving up the cost of credit.

ECB lends $641B to Europe banks via LTRO  — The European Central Bank on Wednesday attempted to send a strong signal to financial markets by offering to loan $641 billion to 523 euro-area banks in a massive three-year funding operation. The bank-funding move by the region’s central bank, known as a longer-term refinancing operation, or LTRO, is open to lenders across the euro zone. The figure came in well above a Reuters forecast for $408 billion. The loans run for three years. The loans expand the central bank’s balance sheet by 20%, according to Louise Cooper, analyst at BCG Partners. A breakdown of which financial institutions were among the bidders for the funding was not immediately available. A representative from the European Central Bank‘s press office said that the central bank would not be releasing the names of the banks that applied for loans. Nor would it provide a breakdown of loans by euro-zone nation. The LTRO operation was the first three-year funding operation undertaken by the central bank. The funds are borrowed at its average benchmark interest rate, which stands at 1%.

Europe Banks Rush To Grasp Lifeline - Hundreds of euro-zone lenders took out €489.19 billion ($640 billion) in low-interest loans from the European Central Bank on Wednesday, as the currency area extended a massive financial lifeline to its struggling banking industry. The unexpectedly heavy demand from 523 banks for the three-year loans highlighted the severity of Europe's financial crisis, while also stirring some hopes that the action could help defuse it, or at least prevent it from getting worse.  Investors didn't seem convinced that the loans would drastically improve banks' prospects. After rallying when the ECB announced plans for the program earlier this month, the Euro Stoxx Bank Index fell 1.5% on Wednesday.

ECB Bazooka is a fizzer - So it seems Santa could only last one night.Yesterday I said Given that many of the European banks are attempting to de-leverage and simply hold higher levels of capital in order to meet their requirements under Basel III this makes sense. However, that doesn’t mean that the new LTRO along with the lower reserve requirements wouldn’t have some flow-on effect to bond markets, I am just not sure it is going to be used at the level and/or for the purpose the bond market seems to be suggesting. There are, however, some rumours out of Italy that suggest otherwise. We will find out the answer to some of those questions tonight when the banks make a choice between the 7-day, 3-month or 3 year ( with a 12 month exit ) repo facility. A good uptake on the later should provide some support for all markets in the short term,  When I said “short term” what I meant was something like a few days in which the market could determine, in the least, if the banks had simply parked the additional new money back into the ECB deposit facility or there were signs that they were using it to buy back their own bonds. However, it looks as though the market decided about one hour after the announcement that 523 banks had used the new 1134 day repo facility to the tune €489.19bn that this new money was going to be for re-capitalisation and de-leveraging operations.

Krugman has shined the headlights on the crucial currency issuer-currency user difference - Randy Wray - The World Discovers Modern Money Theory. Who wuddavthought? The problem with the Euro is that formerly sovereign nations gave up their currencies to adopt a foreign currency called the Euro. Now, MMT followers have been saying that since the Euro was proposed. It was a system designed to fail, and like all systems designed to fail the only question was when. We now know the “when” is January 2012—when the Euro banks fail and Italy leaves the union. But we were ignored for a decade and a half, while economists and policymakers celebrated the glorious “Union”. Heck, the union was so great that the EMU invited every Tom, Dick, and Harry nation to join up. They added nations with wages and living standards that were barely above subsistence level—indeed, nations that were willing to reduce living standards below subsistence if only they could join and reap the supposed benefits of joining the most dysfunctional empire ever constructed. As evidence that the world is coming around (finally) to the MMT view, take a look at Dean Baker’s excellent piece. Now here’s the ironic thing. It seems to have been none other than Paul Krugman who made it safe for others to adopt MMT. He shined his headlights on the obvious: the reason why interest rates on government debt are not exploding in countries like Japan, the US, and the UK is because they issue their own currencies.

ECB lends banks $639 billion over 3 years - — Struggling banks snapped up euro489 billion ($639 billion) in cheap loans from the European Central Bank on Wednesday, a sign of just how hard or expensive it has become to borrow from each other. The huge demand for newly available three-year loans comes as fears rise that heavily indebted European governments could default and force banks and other bond holders to take big losses. The loans to 523 banks surpassed the euro442 billion ($578 billion) in one-year loans extended in June 2009, when the global financial system was reeling from the collapse of the U.S. investment bank Lehman Brothers. It was the biggest ECB infusion of credit into the banking system in the 13-year history of the euro. The ECB wants banks to use the money to help pay off or refinance some euro230 billion ($300 billion) in existing loans early in 2012. Without the special support from the ECB, banks would have had to cut back on loans to businesses and further squeeze the European economy.

A Central Bank Doing What Central Banks Do - “Talk tough, and open the vaults.” That should be the slogan of Mario Draghi1, the president of the European Central Bank2. In recent weeks, the new president publicly insisted the central bank would never do any of the things that Germany opposed. The bank would not drastically step up its purchases of Spanish and Italian government bonds. It would not directly finance European governments. It would not backstop European rescue funds or print money that the International Monetary Fund could use to bail out governments. It would do only what central banks normally do. It would lend to banks. It turns out that may be enough to stem the European crisis for at least a few years, and go a long way to recapitalizing banks in the process. That fact only became clear on Wednesday, although Mr. Draghi announced his intentions3 on Dec. 8, when the central bank said it would offer to lend money to banks for three-year terms, in unlimited amounts, at a very low rate. In reality, it was an offer banks could not refuse. They will initially pay the central bank’s official rate of 1 percent. But if the bank lowers the rate in coming months — as it is widely expected to do — the rate on these loans will drop as well.

Herr Draghi or Signor Draghi, and the ECB's Santa Rally (technical) –  The ECB’s back-door bail-out for Italy, Spain, Belgium, and… France? …is €489bn. Roughly €300bn of today’s eagerly awaited LTRO tender is recycled old money from earlier support operations. The new money is €200bn. This alone is not going to shore up the sovereign states of southern Europe as they grind deeper into recession/depression. Enjoy Mario Draghi's Santa Rally while it lasts. The euphoria is likely to dissipate once markets remember the sheer scale of the task at hand. The banks are under massive pressure to raise their core Tier 1 capital ratios to 9pc by next June. This requires a €2.5 trillion adjustment according to the BIS’s Global Stability Board. Most of that is going to be done by slashing loan books – deleveraging in the jargon – since they cannot raise fresh capital at a viable cost and don’t wish to be nationalised. So will this extra €200bn be used to buy Italian and Spanish bonds, or instead to plug a frightening number of leaks across the financial system? "In a deleveraging world, we doubt that this will be used in any meaningful way to buy sovereign bonds… given the amount of scrutiny under which banks are regarding their sovereign exposures," said Nick Matthews from RBS. "The operation is thus unlikely to have a long lasting confidence boosting impact, in our view."

The Subtle ECB - Krugman - A number of people have asked me for my reaction to Floyd Norris’s piece today on Europe. It’s a good summary of the argument many people are making about why the European situation looks less dire right now than it seemed a few weeks ago. Regular readers may recall that I and others were adamant that it was essential for the ECB to step in and buy the debt of troubled governments, to head off what looked very much like self-fulfilling panic. The ECB refused to do that, and many of us took that refusal at face value — but the argument is that in reality it did the functional equivalent, lending very large sums to banks with sovereign debt as collateral, so that it was in effect doing the purchases we wanted, but laundering those purchases through banks. As Floyd says, the nature of the scheme, with 3-year loans, means that it only encourages purchases of fairly short maturity debt. So in the case of Italy, you can see a dramatic drop in 2-year rates:

Euroland euphoria on Mario Draghi bank rescue - Southern Europe's battered debt markets are basking in a glorious pre-Christmas rally as hedge funds and investors celebrate a blast of cheap liquidity from the European Central Bank.  Yields on Spain's three-month notes plummeted to 1.74pc on Tuesday from 5.11pc last month, leading euphoric moves across the eurozone periphery. Spanish 10-year yields fell below 5pc for the first time in two months, with credit rallies in Italy, Belgium, and Ireland.  Exuberance lifted Germany's DAX index by 3pc, the French CAC by 2.7pc, and FTSE 100 by 1pc, with ripple effects through commodities and risky assets worldwide.  The buying spree comes as markets wait for the ECB to turn on the monetary spigot. Funds are betting that an offer of unlimited bank credit for three years – long-term repo operations (LTROs) – will transform the underlying dynamic of Europe's debt crisis. Banks will be able to borrow at 1pc to buy Spanish and Italian bonds at 5pc or 6pc. It allows the ECB to prop up sovereign states without violating EU treaty law.  Lenders call it the "Sarko trade" after French leader Nicolas Sarkozy said the liquidity will allow each state to "turn to its banks" for finance. The ECB move is part of a string of fresh measures by the bank's new president Mario Draghi to head off a dangerous escalation of the crisis. "We are trying to avoid a credit crunch," he told Euro MPs on Monday, warning that EMU banks and states must together to raise €720bn (£602bn) over the first quarter of 2012.

The ECB, eternal and infinite - The European Central Bank has come under criticism for its failure to act as lender of last resort to embattled sovereigns. Yet when it comes to banks, the traditional recipients of central bank support, the ECB is lender of last resort on steroids. Today, it lent 489 billion euro to 523 banks at 1%, at its first three-year refinancing operation. It was its largest refinancing ever. Banks used some of that to pay off shorter term loans from the ECB. Even so, net lending of 235 billion euro brought the ECB’s total loans to banks to almost 1 trillion euro.  Mario Draghi, the ECB president has repeatedly insisted the ECB’s purchases of government bonds were neither “eternal nor infinite,”  but that clearly doesn’t apply to its lending to banks. As banks’ private sector funding dries up, the ECB has supplied not just all the short-term funds they need, but all the dollar funds they need (via the revamped swap lines from the Federal Reserve) and now long-term funds as well. This operation is crucial to understanding the ECB's strategy during the crisis. Both the ECB and its critics agree on the ultimate solution to the crisis: some form of joint liability for the region's debts coupled with a political compact that enforces fiscal responsibility on member states. Where they differ is the responsibility of the ECB in making that happen.

ECB unleashes a wall of money - If the answer to the eurozone crisis was a “wall of money”, it was provided on Wednesday by the European Central Bank. More than 500 banks borrowed a total of €489bn in three-year loans – equivalent to about 5 per cent of eurozone gross domestic product and the largest amount provided in a single ECB liquidity operation. Under Mario Draghi, its president since November 1, the ECB has resisted political pressure to step up intervention in government bond markets. By instead flooding the financial system with funds, the bank hoped to achieve at least three objectives: to minimise the risk of a damaging bank collapse; prevent a “credit crunch” plunging the eurozone into a deep recession; and, in turn, relieve stress in government debt markets. “The boldness was by the banks, but the huge amount the ECB lent was ironic given all the fuss about it buying a little bit of sovereign debt,” said Erik Nielsen, chief economist at Unicredit. Will the central bank’s plan work? The largest chunk of the €489bn comprised funds that were switched from shorter term ECB lending facilities. Only about €190bn was fresh liquidity. But the ECB hopes the longer time period will make a big difference, giving banks greater security and allowing them to think more strategically.

ECB lends banks $639 billion over 3 years - Struggling banks snapped up €489 billion ($639 billion) in cheap loans from the European Central Bank on Wednesday, a sign of just how hard or expensive it has become to borrow from each other. The huge demand for newly available three-year loans comes as fears rise that heavily indebted European governments could default and force banks and other bond holders to take big losses... "The good news is, the ECB's efforts to increase liquidity are working," said Jennifer Lee, an analyst at BMO Capital Markets. "The bad news is, high demand for the loans creates worries that banks are urgently in need of funds to boost liquidity."

Eurozone zombies follow Mario Draghi's cheap money -  Mario Draghi donned his plague suit on Wednesday and urged European banks to "Bring out your dead". But rather than financial corpses it was €489bn (£408bn) of zombie debt from zombie banks that emerged blinking into the daylight.  Far from reassuring markets, the scale of Wednesday's bail-out for eurozone banks by Draghi's European Central Bank (ECB) should simply confirm worst fears. European banks face a €600bn tsunami of debt coming due in 2012 (mostly in the first quarter) and many simply can't pay up because the usual source of refinancing, wholesale money markets, are refusing to lend them any more. Sound familiar?  Draghi has had to ignore any sense of moral hazard and agree to fund weak banks at the expense of strong. He has opened a quantitative easing (money printing) exercise of enormous proportions. Weak banks unable to fund themselves on the open market are now hooked on cheap ECB money.

Where will the ECB’s billions go? - The market has had a full day now to digest the results of the ECB’s debt auction, and Floyd Norris, for one, is wildly enthusiastic about them. The ECB’s strategy, he writes, “may be enough to stem the European crisis for at least a few years, and go a long way to recapitalizing banks in the process”. Norris’s bullishness is based on what you might call the Sarkozy trade — the idea that a huge amount of the ECB’s new lending will end up being invested in Eurozone government debt. He calls it “an obvious, virtually risk-free, option” for the banks who borrowed ECB funds: It would be nice if some of it were lent to the private sector to spur growth and investment. But the logic of putting it in two- or three-year government notes is obvious. Well, it’s not that obvious. Here’s the math: if you take all the new ECB money which entered the market yesterday and subtract out all the maturing ECB debt which needed to be rolled over, you end up with some €210 billion in new funds — a number which is startlingly close to the €230 billion of European bank debt which is coming due just in the first quarter of 2012. And for the time being, the ECB is the only entity in the world willing to lend European banks €230 billion.

Wolf Richter: CEO of Dexia – ‘Not A Bank But A Hedge Fund’ - Dexia SA, the Franco-Belgian mega-bank that collapsed and was bailed out in 2008 and that re-collapsed in early October, is a big deal in Belgium where it employs 10,000 people and has over 21 million bank accounts. Its assets of $715 billion dwarf Belgium’s $395 billion economy.  The three countries involved in the bailout agreed in October to guarantee €90 billion in loans, of which Belgium will be responsible for 60.5%, France for 36.5%, Luxembourg for 3%. Belgium’s portion, €54.5 billion, represents nearly 14% of its GDP. The process is moving forward. On December 21, the European Commission approved on a temporary basis €45 billion of those guarantees though they violate EU rules on government subsidies for private companies. Taxpayers are paying a heavy price for Dexia’s bailout. Belgium nationalized the Belgian entities of Dexia, including untold amounts of toxic assets. The French entity, which was involved in an enormous subprime scandal à la française, was taken over by the Caisse des Dépôts and the Banque Postale—both owned by the French government. Precision Capital, a Luxembourg company controlled by Qatari investors, bought 90% of Dexia Bank International Luxembourg, valuing the firm at €730 million, a steep discount from the expected €1 billion. Luxembourg acquired the remaining 10%. Other entities remain on the block.

European Union proposes world's largest ever cultural funding programme - The Art Newspaper: The €1.8bn allocated for culture comes at a time of worsening economic crisis across the Eurozone. As the economic crisis deepens across Europe, the European Commission plans to launch the world's largest ever cultural funding programme, with €1.8bn allocated for visual and performing arts, film, music, literature and architecture. The commission's Creative Europe project plans to release the money between 2014 and 2020. If the scheme is approved late 2012, an estimated 300,000 artists are due to receive funding. The proposal has received a mixed response from key cultural commentators, with some saying that banking on culture and the arts to help prop up EU member states and stimulate the economy is unlikely to work.Dexter Dalwood, the UK artist nominated for the Turner Prize in 2010, is sceptical. “If the goal is to create social cohesion isn't it going to favour obvious visible targets like classical music, the performing arts and public art?” he says. “On paper this looks fine. [But] in reality who gets the money ? Is there a hefty application process where the outcome of the work has to be clearly stated? Is there any chance it could trickle down to the most needy creative people?” Dalwood suggests the most effective form of subsidy for artists would be to make affordable studios.

IMF calls Irish rescue ‘fragile’  - Ireland’s lauded rescue program is at risk of falling off track as a slowing European economy cuts into the country’s exports and sparks concern about the nation’s banking system, the International Monetary Fund reported Tuesday. While praising Irish officials for meeting budget targets and reviving the Irish economy, the fund said that the country’s program is nevertheless in a “fragile” state. The slowdown in the rest of Europe, particularly in key trading partners such as Britain, means that economic growth for next year probably will fall to 1 percent, half of what was estimated. Exports, critical to the small country’s success, are declining. And the weight of outstanding bank debt is making it hard for Ireland to meet the financial targets laid out under the joint IMF-European Union rescue program, which has been a by-the-book success. To shore up faith in the country’s banking system, Irish officials have insisted on honoring most of the bonds issued by Irish banks. The IMF said that commitment makes sense and allows the nation to rebuild a healthy core of private banks. A default on the bonds probably would leave the banks unable to raise money from private investors in the future.

The IMF on Ireland - Krugman - The latest report is out, and it’s not too enthusiastic, even though it was prepared before the latest set of bad numbers. It’s worth noting that the IMF is aware that the huge apparent improvement in relative unit labor costs is to a significant degree a statistical illusion: These aggregate improvements should be interpreted with care, as they partly reflect a shift from low productivity sectors, such as construction, to high valued added export sectors. See Box 5 in Ireland—First and Second Reviews of the Extended Arrangement and Request for Rephasing of the Arrangement (IMF Country Report No. 11/109) for a discussion of the impact of compositional effects on competitiveness measures, where excluding such effects suggests room for further progress on improving competitiveness. That’s international-organization speak. What it means is that Ireland is still way out of line, requiring lots more “internal devaluation” via deflation. Not a happy prospect. It’s also interesting to note that most — most!– of the export rise has come from pharma, which is very intensive in foreign-owned capital, and does very little for Irish incomes and employment.

The Broad Sovereign Downgrade - Rebecca Wilder - Recently I’ve spent time thinking about global bond investors, especially those conservative investors that stick with the high-quality sovereigns. I’ve got news for them: the share of high-quality investment grade sovereigns – BBB- and above is investment grade - is shrinking. Some bullet points comparing ratings in December 2007 to December 2011:

  • From a sample of 76 emerging market (EM) and developed market (DM) economies, 23 sovereigns have been upgraded by S&P (I use S&P specifically, but the agencies usually move in lockstep at a lag). These upgrades span both EM and DM markets, but EM dominated with 19 upgrades overall..
  • The number of high-quality investment grade sovereigns – A- and above – fell by 6.
  • The AAA universe shrank by 2 economies – more is to come with imminent downgrades in Europe.

2007-2011 in charts: moving down in quality

Greece Nears Deal With Private Creditors - Greece is close to an agreement with its private-sector creditors to restructure the country's debt, Finance Minister Evangelos Venizelos said. "We are close to a deal; I believe that, because I have personal knowledge of the negotiations... and I know it is doable," he told a gathering of business and labor leaders Tuesday. If an agreement is reached, about €200 billion ($260 billion) of debt held by private investors will be cut in half and save Greece some €5 billion a year in debt-servicing costs. Recent media reports have described the talks as advancing after the two sides reached a deal to apply U.K. law to new bonds issued by the Greek government, and agreed on other details. In late October, euro-zone governments called on Greece to secure a 50% write-down on the debt held by private creditors as a condition for a €130 billion bailout package for the country. But they said the participation of private investors should be voluntary, to avoid payouts under credit-default swaps that might inflict further damage on the currency area's fragile financial system.

Greek debt talks hit trouble as hedge fund walks out - Talks over restructuring part of Greece's massive public debt ran into trouble on Tuesday as one fund walked away from negotiations, fuelling growing doubts about whether a deal that is crucial to a new bailout agreement can be reached this year. Vega Asset Management, a Madrid-based fund, resigned from the steering committee representing private creditors negotiating a voluntary restructuring of Greek government bonds, two sources familiar with the situation said. They said the disagreement stemmed from differences over how to proceed with a voluntary bond swap, although there were no more precise details. Vega, the only fund represented on the steering committee, declined to comment. Greek Finance Minister Evangelos Venizelos put a brave face on the tense discussions, saying he was confident that negotiators were close to an agreement, but there was much less optimism from bankers who have been following the talks.

Greece's Creditors Said to Resist IMF Push for More Losses -- Greece's creditors are resisting pressure from the International Monetary Fund to accept bigger losses on holdings of the indebted nation's government bonds, said three people with direct knowledge of the discussions. Lenders want the 70 billion euros ($91 billion) of new bonds the government will issue in return for existing securities to carry a coupon of about 5 percent, said the people, who declined to be identified because the negotiations are private. The IMF is pushing for creditors to accept a smaller coupon in order to reduce Greece's debt-to-gross domestic product ratio to 120 percent by 2020, a key element of the Oct. 27 agreement by European Union leaders, the people said. Greece's debt will balloon to almost twice the size of its economy next year without a write-off accord with investors, the IMF said on Dec. 13. The IMF and EU leaders are trying to bring the country's debt down to a sustainable level.

A Direct Job Creation Program for Greece - The Levy Institute, with underwriting from the Labour Institute of the Greek General Confederation of Workers, has helped design and implement a program of direct job creation throughout Greece. Two-year projects, financed using European Structural Funds, have already begun. This report by Senior Scholar Rania Antonopoulos, President Dimitri B. Papadimitriou, and Research Analyst Taun Toay traces the economic trends preceding and surrounding the economic crisis in Greece, with particular emphasis on recent labor market trends and emerging gaps in social safety net coverage. Overall, the report aims to aid policymakers and planners in channeling program resources to the most deserving regions, households, and persons; and in devising data collection methodologies that will facilitate accurate and useful monitoring and evaluation systems for a targeted employment creation program. On its own, the report provides an excellent in-depth portrayal of the evolution of the Greek economy since joining the euro and traces some of the harrowing challenges ahead—particularly in youth employment (the youth labor force participation rate is 20 percent below the OECD average—what’s happening in Greece will truly mark an entire generation).

Ties between sovereigns and banks set to deepen - A few weeks ago, some senior officials at Bank of Tokyo Mitsubishi spotted a fascinating fact: for the first time the volume of Japanese government bonds sitting on the bank’s balance sheet swelled above corporate and consumer loans.  Yes, you read that right: at an entity such as Bank of Tokyo Mitsubishi, it is now the government – not the private sector – which is grabbing most credit, as the bank gobbles up JGBs, notwithstanding rock-bottom low rates.  Welcome to a key theme of 2012. During the past four decades, it was widely assumed in the western world that the main role of banks and asset managers was to provide funding to the private sector, rather than act as a piggy bank for the state. But now, that assumption – like so many of the other ideas that dominated before 2007 – is quietly crumbling. And not just in Japan.  In Europe, Nicholas Sarkozy, French president, indicated earlier this month that he is keen for banks to use their €489bn European Central Bank bonanza to purchase more eurozone government bonds. Asset managers in places such as Spain and Ireland are now facing pressure to acquire more sovereign debt, or quasi sovereign bonds, as debt pressures bite there. More subtly, British banks are being required to buy more sterling bonds, as a result of regulatory reform. Even in the US, government officials and bank leaders have recently taken to muttering that American banks have an unusually low holding of US government bonds, by international standards.

More on the euro carry trade - From George Magnus in the FT: Markets may derive some comfort from this initiative in the short-term as default risks are reduced, but like all financing measures, it only buys time in which economic depression will undermine it. And by effectively binding banks and sovereigns even more closely together, it is a roundabout route to nationalisation of sovereign finance, which ironically, makes fragmentation of the euro more likely. And here is John Cochrane, in what is generally a provocative essay: Indebted governments have been pressuring banks to buy more debt, not less. As banks have been increasing capital, they have loaded up even more on “risk-free” sovereign debt, which they can use as collateral for ECB loans. The big ECB “liquidity operation” that took place yesterday will give banks hundreds of billions of euros to increase their sovereign bets. Bank depositors and creditors have figured this out, and are running for the exits. By stuffing the banks with sovereign debt, European politicians and regulators are making the inevitable default much more financially dangerous. So much for the faith that regulation will keep banks safe.

How Bad Ideas Worsen Europe’s Debt Meltdown - Conventional wisdom says that sovereign defaults mean the end of the euro: If Greece defaults it has to leave the single currency; German taxpayers have to bail out southern governments to save the union. This is nonsense. U.S. states and local governments have defaulted on dollar debts, just as companies default. A currency is simply a unit of value, as meters are units of length. If the Greeks had skimped on the olive oil in a liter bottle, that wouldn’t threaten the metric system. Bailouts are the real threat to the euro. The European Central Bank has been buying Greek, Italian, Portuguese and Spanish debt. It has been lending money to banks that, in turn, buy the debt. There is strong pressure for the ECB to buy or guarantee more. When the debt finally defaults, either the rest of Europe will have to raise trillions of euros in fresh taxes to replenish the central bank, or the euro will inflate away.

Is Mario Draghi Preparing To 'Spring A Trap' On The Germans In Just A Couple Months? - Writing in The Telegraph, Ambrose Evans-Pritchard, reports on the suspicious of London bankers who are anticipating Mario Draghi's next move as head of the ECB:  The small band of City specialists who really have their fingers on the pulse of the ECB are split on what happens next: The Herr Draghi camp thinks he means what he says about respecting the EU Treaties and Lisbon’s Article 123 prohibiting monetary financing of deficits. The Signor Draghi camp thinks he is slowly combining an alliance of ECB doves ready to spring a trap on the Bundesbank, with rate cuts to 0.5pc by February and then signals of forthcoming QE – most likely by playing the forward-looking "deflation card" and muttering about impaired "monetary transmission channels". One notes that Signor Draghi dodged the crucial the question on QE in his interview with the Pink Paper on Monday. The transcripts show that he refused to rule out printing money. Meanwhile, writing in the FT, Gavyn Davies allies himself with the Signor Draghi camp, saying that for all of his hawkish talk, the fact of the matter is that the ECB is using really using its balance sheet to end the crisis.

Hungary Hit by Second Debt Downgrade to Junk on Orban’s Policies - Hungary lost its investment-grade rating at Standard & Poor’s, the second such downgrade in a month, increasing pressure on Premier Viktor Orban to obtain an International Monetary Fund backstop and reverse policies. The country’s long- and short-term foreign- and local- currency sovereign credit ratings were cut one step to BB+ from BBB-, the company said yesterday in a statement.  The IMF and the European Union suspended talks over an aid package to Hungary, citing concerns about the government’s plans for a central bank law they say may curb monetary-policy independence. Hungary will have the highest debt level and slowest economic growth among the EU’s eastern members next year, the European Commission forecast on Nov. 10. IMF backing would bolster policy credibility, S&P said. Hungary’s five-year credit-default swaps, which measure the cost of insuring government debt against non-payment, traded at 572 basis points yesterday, the ninth-highest in the world, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers.

Italian austerity underway - The ECB cash for collateral swap, as part of the LTRO and totalling some €209.9bn, would have occurred some time in the last 24 hours. So far there hasn’t been any positive movements in the places that matter. Spanish and Italian bond yields crept higher on Thursday and underperformed German debt as markets grew sceptical that banks would use funds borrowed from the European Central Bank to buy lower-rated government bonds. Banks borrowed a huge 489 billion euros from the ECB at an unprecedented offer of three-year loans on Wednesday, which some had expected to be reinvested in Spanish and Italian debt and help ease borrowing costs. But, those looking for an immediate boost to Italy and Spain were likely to be disappointed. Traders said the preference was to reinvest some of the funds into safe-haven paper rather than pick up the higher yields on offer from some of Europe’s more troubled states. “What happened yesterday is not a silver bullet to the crisis… but it is too soon to see the impact yet,”

Italy's quarterly GDP declines more than forecast - Italy's gross-domestic-product estimate for the third quarter showed that the economy contracted at a faster rate than expected, according to media reports. GDP in the southern European nation declined 0.2% on a quarter-over-quarter basis. A Reuters consensus expected a 0.1% decline. The average growth across the 17-nation euro zone is 0.2%.

Finnish govt sees possible recession - Finland could hit recession early next year, the Finance Ministry said Tuesday, as it slashed forecasts for economic growth in 2012 to 0.4 percent from an earlier predicted 1.8 percent. The ministry predicted that growth in 2011 will be 2.6 percent and after a year of low demand and falling investments next year it should pick up again in 2013 and reach 1.7 percent. The ministry's economic review warned that Finland might hit a recession at year-end or early 2012 unless growth in its main trading partners - Russia, Sweden and Germany - markedly improves. "Growth in 2012 will depend almost entirely on domestic demand since exports will remain subdued in 2012," the review said. "Dwindling international and domestic demand is also reflected in investment demand. Private investment is projected to contract by 1.5 percent in 2012."

ECB buys few bonds for second week - The European Central Bank held its bond purchases to a bare €19 million ($24.8 million) this week. The scant amount indicates that the bank has for now almost ceased the controversial program which has helped keep borrowing costs down for Italy and Spain. It bought a minimal €3.36 million last week. That makes two weeks of near-negligible purchases, following €635 million the week ending Dec. 9 and €3.66 billion the week ending Dec. 2. The program has helped keep Italy and Spain from financial disaster from high borrowing costs. But the ECB says it is of limited amount and duration and that it is up to governments to cut their deficits and not wait for a central bank bailout.

Expansionary Austerity – After the Zombies - The failure of expansionary austerity is already evident. Predictions that, once the state got out of the way, the private sector would come roaring back, have proved laughably false. After more than a year of austerity in the US and Europe, there is no sign of any recovery. Rather, the risk of another crash looms larger than ever.  Expansionary austerity is not simply a zombie economic idea. It forms the basis of a political strategy of class war, undertaken by the financial and political elite (the “1 per cent”) to hold on to the wealth and power they accumulated during the decades of market liberalism, and to shift the costs of their own failure on to the rest of the population. An effective response must similarly combine an economic analysis with a policy program and a political movement to mobilise resistance to the push for austerity. In economic terms, the primary need is to relearn the basic lessons of Keynesian economics. Government intervention can help to stabilise aggregate demand and, when monetary policy is ineffectual because of a liquidity trap, expansionary fiscal policy is the optimal choice.

How to avoid the ‘zombification’ of Europe -  The latest European summit captured headlines for the wrong reasons. The focus was on the spat between the UK and its EU partners, but it should have been on the more urgent fundamental issue of whether European leaders were any closer to reversing the “zombification” of European economies, sovereign states, banks and financial instruments. The short answer, unfortunately, is no. The main problem is that European leaders have misdiagnosed the underlying causes of the crisis, ending up with a flawed agenda and inappropriate policies. They attribute the crisis to fiscal profligacy and the lack of adequate institutional fiscal mechanisms, rather than to the large external and competitiveness imbalances between member states. So, instead of coming up with an economic and debt adjustment strategy that distributes reform responsibilities symmetrically between debtors and creditors, leaders continue single-mindedly to pledge institutionalised fiscal discipline as the solution to the crisis. They have, in effect, sealed a pro-cyclical austerity zone. It’s quite likely that eurozone gross domestic product will contract at a roughly 2 per cent rate over the coming few quarters, and the prospects beyond may not be much brighter. Eurozone economies are trapped in a circle of weak-growth or no-growth, ever-retreating fiscal and public debt targets, and more austerity that depresses growth.

Europe Braces for Long Winter - Well, it looks like Santa finally stuck his head out of the dark cave for a look around. In Europe Santa has come in the form of the ECB’s LTRO (Long Term Refinancing Operation): Italian and Spanish bonds extended their recent rally on Tuesday as optimism grew that banks would borrow large amounts of cheap cash at the European Central Bank’s three-year tender and reinvest it in higher-yielding euro zone debt. Spanish 10-year bond yields fell for an eighth straight session to hit their lowest in more than two months while slowing investor demand for safe-haven German debt pushed Bund futures down by a full point. “(This) is led by the excitement about the upcoming ECB tender… in this thin market without any supply to take down this obviously gives the periphery some real tailwinds,”  As I discussed last week I expect the LTRO to give a short term boost to sovereigns because it may lead to banks purchasing more short and medium termed debt of their national sovereign bonds and ride the carry trade between those bonds and the ECB’s new long term repo facility. It is yet to be seen if that is the case because there are substantial risks involved in the process and banks already own a significant amount of government bonds. We will find out the answer to some of those questions tonight when the banks make a choice between the 7-day, 3-month or 3 year ( with a 12 month exit ) repo facility. However, as I also stated last week , this operation does very little for the banks existing lending asset quality. That is governed by the real economy. In the parts of Europe where the sovereigns need the most help this continues to worsen as austerity bites into industrial production and employment and the deflation of previous asset booms continues to take its toll

Why Europe’s Back Door Bailouts Won’t Work - Watching the euro zone crisis is like watching a dysfunctional family come together at the holidays. They gather with the best of intentions and the highest of hopes, yet every meal or touch football game in the backyard presents another opportunity to act out the same old destructive dramas—mom loved you more, I worked harder while you had it easy, etc. So it is with the Eurozone, as dysfunctional a family as any. For starters, there’s very little trust between the members. You can see this in the pitifully inadequate rescue proposals that have emerged from this latest European Union summit. One part of the plan requires EU countries to loan the IMF money from their own coffers, so that the Fund’s bailout power (and the prospects of the Eurozone) will be bolstered in such a way that non-European countries will then want to then contribute money to the IMF’s European bailout efforts. Follow that circular logic? Few people do. Let’s put aside the obvious problems with this plan, which is that major non-European lenders like China have wisely said they want nothing to do with European debt (they are too busy buying up Europe’s best companies on the cheap). The key take away is that European nations are ambivalent about their own prospects (hence wanting to hedge the risk with outsiders’ money), and doubtful of each other’s commitment to saving the monetary union.

ECB Overnight Deposits Reach New 2011 High —Use of the European Central Bank's overnight deposit facility reached a new record high for the year Thursday, suggesting recent measures by central banks and policy makers still aren't enough to restore confidence in inter-bank lending markets. Banks deposited €346.99 billion ($453.38 billion) in the overnight deposit facility, up from €264.97 billion a day earlier and a previous high for the year of €346.36 billion, reached earlier this month. The high level reflects ongoing distrust in inter-bank lending markets, where banks prefer using the ECB facility as a safe haven for excess funds rather than lending them to other banks. The high deposit level also suggests markets aren't fully convinced that the ECB's massive long-term loan allotment is enough to fortify the currency bloc's banking sector. The central bank extended nearly half a trillion euros in long-term loans to euro-zone banks Wednesday, hoping to ease fears of a new credit crunch as banks struggle to borrow from markets. Separate actions in recent weeks by central banks and policy makers have also sought to make dollar loans cheaper for euro-zone banks and to boost fiscal integration in the bloc.

Call for QE to stave off euro deflation - A top European Central Bank policymaker has called for “quantitative easing” to be used to boost the euro zone economy if deflation risks emerge across the 17-country region. The comments by Lorenzo Bini Smaghi, ECB executive board member, are the strongest indication yet that the central bank would expand its policy tools to prevent a possible disastrous economic slump in continental Europe. In an interview with the Financial Times, Mr Bini Smaghi also hinted at frustration over the UK’s reluctance to join efforts to strengthen the euro zone. The euro’s success was in the City of London’s interest, he said. “The European Union, and ECB, would certainly contribute to help Britain if London was in difficulty. I would thus expect a reciprocal attitude.” Speaking in Frankfurt on Thursday, Sir Mervyn King, governor of the Bank of England, said swift implementation of measures to shore-up the euro zone was of “utmost importance”, warning that “stressed financial conditions are passing through to the real economy”. The Italian Mr Bini Smaghi steps down at the end of the year to make way for a Frenchman on the ECB board. So far, ECB policymakers have been wary about commenting on using “quantitative easing” – creating money and buying assets – if necessary to boost growth prospects. But his comments indicated its possible use had been debated within the central bank.

ECB's Balance Sheet Now Far Bigger Than Fed's, More Levered Than Lehman, PIIGS Exposure Up 50% In 6 Months ZeroHedge - While well-known to most, what may be lost on all those calling for the ECB to commence outright printing, is that as today's Bloodmberg chart of the day shows, the ECB's balance sheet is not only far greater than the Fed, at $3.2 trillion compared to $2.9 trillion for Ben Bernanke, but at 30x leverage, has the same risk as Lehman did at its peak. However, one major distinction between the Fed and the ECB is that while the Fed continues to be shrouded in almost impenetrable secrecy on an absolute basis, it is transparent as a wet t-shirt competition during Spring Break at Panama City Beach compared to the ECB. From Bloomberg: "Without information on the quality of assets on the ECB’s balance sheet or how far it’s willing to allow leverage to increase, investors may doubt the bank’s ability to prop up the financial system, and demand higher yields to buy some countries’ bonds, he said. "Sovereign spreads could rise again if investors become uncomfortable with ECB leverage without a fully detailed rescue package,” said Tyce. “The ECB is providing liquidity and confidence to the banking system, yet all the while its own leverage and balance sheet size is hitting new highs. It seems likely that the market will begin to watch the rising leverage with interest and growing concern."

British Prepare Evacuation Plans Ahead of Spain and Portugal Collapse - British Foreign Office personnel have proposed emergency evacuation plans for their citizens living throughout Europe, especially in Spain and Portugal. As tensions over the survivability of the Euro mount, the government warns that a collapse of the banking sector and the European monetary unit may make it impossible for those with assets in affected countries, including bank deposit accounts and homes, to access their funds and evacuate to Britain. The drastic proposals emerged as a former Security Minister warned expats could be left stranded and destitute by the break-up of the single currency. Brits who invested their savings in their adopted countries may not be able to withdraw cash and could even lose their homes if banks call in loans, worried ministers are warning. The Foreign Office is preparing to bring them back from Spain and Portugal if the two countries are forced out of the euro, triggering a banking collapse. … Commenting on the evacuation plans, she added: “I think they are right to be doing that. I think this is a real contingency that they need to plan against – very, very worrying.”

UK Consumer confidence 'close to all-time low' - UK confidence was at a near-record low in November, according to a survey from the Nationwide Building Society. The Nationwide Consumer Confidence Index rose to 40 from its record low of 36 in October. It is still at about half its long-term average of 77, and any reading below 50 indicates negative sentiment. The latest figure suggest households remain under financial pressure which is blamed on rising unemployment and prices. November's survey also showed twice as many people judged it a bad time rather than a good time to make a major purchase. Nationwide also reported that people were expecting house prices to fall by an average of 1.1% over the next six months.

Moody's says euro crisis danger to UK top-debt grade (Reuters) - Britain's top-notch debt rating is under threat from the crisis in the euro zone, and further shocks to the country's economy could derail government efforts to balance the budget, ratings agency Moody's said on Tuesday. Britain's scope to absorb further fiscal shocks while retaining its stable outlook and triple-A rating have deteriorated over the past year due to weak growth, and the country faces "formidable and rising challenges," Moody's said. "Since the last annual report, the amount of headroom for Britain has declined," Moody's analyst Sarah Carlson told Reuters after the publication of the ratings agency's end-of-year assessment of Britain's ability to repay its debts. Markets are on the lookout for news on France's AAA-rating, which led to a spat between Paris and London after French officials suggested Britain rather than France should be next in line for a ratings downgrade. Britain is still enjoying markets' trust, and yields on its 10-year bonds are near record-lows, just above 2 percent. "The currently stable outlook on the UK government's Aaa rating depends in part on the assumption that the government will stay on track with its fiscal consolidation programme," Moody's said in its annual credit report.

BOE Unanimous as Bond Buying Pace Approaches Market’s Limit -- Bank of England policy makers said the pace of their bond purchases is close to the market’s capacity as some signaled further stimulus might be needed next year to weather Europe’s sovereign debt crisis. The Monetary Policy Committee, led by Governor Mervyn King, voted unanimously to keep the target for gilt buying at 275 billion pounds ($432 billion) after increasing it by 75 billion pounds in October, according to the minutes of their Dec. 7-8 meeting published today in London. They also voted 9-0 to keep the key interest rate at a record-low 0.5 percent. “Some members continued to note that the balance to risks to inflation in the November inflation report projections meant that a further expansion of the asset purchase program might well become warranted,” the minutes said. “It was noted that market capacity made it difficult to increase the monthly rate of purchases substantially above what was already under way.”

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